enterprise wide risk management
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Enterprise Wide Risk
Management
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Topic:
Enterprise wide risk management
ERM is the process of identifying,measuring and controlling the effect of
internal and external factors that (can)negatively affect the value of a company.
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Goal:Managing the ERM Process
riskfactors
riskobjects
riskmea-sures
riskappe-tite
loss profit
uncertainty
beha-vior
s
R
L
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Goal:Managing the ERM Process
models
riskfactors
riskobjects
riskmea-sures
riskappe-tite
loss profit
uncertaint
y
beha-vior
s
R
L
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Challenges:The 6 biggest issues
Combining different risk types
Timeliness of figures
Guaranteeing accuracy of figures Interpreting the analytical results
Running out of (computer) steam
Qualified personnel
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Combining different risk types
Different risk types:credit risk
market riskFX riskIR risk
legal riskoperational risk
etc.
Different risk factors:counter party defaultmarket risk
FX ratesInterest rates
legal structurefraud, human errors
?Different risk measures:Credit VaRMarket VaR
Total risk < sum of all risk types
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Guaranteeing accuracy of figures
VaR = 150 Mln with 95% confidence
VaR = 400 Mln with 98% confidence
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Guaranteeing accuracy of figures
400,000500,000600,000700,000800,000900,000
1,000,000
Confidence level
VaR
95,0% 99,9%
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Interpreting the analytical results
Dear CEO:
Our Value at Risk is USD 5,000,000!
Dear Auditor:
What the !@&*# does that mean for my company?
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Running out of (computer) steam
5,000 trades per day100 positions
100 risk factorsSuppose you want to do a Monte Carlosimulation with 100,000 replications100 * 100 * 100,000 = 1,000,000,000
calculations
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Challenges:the 6 biggest issues
Combining different risk typesTimeliness of figuresGuaranteeing accuracy of figures Interpreting the analytical results
Running out of (computer) steamQualified personnel
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How can technology help?:Success criteria
All major analytical techniques, within a singleenvironment
Full parametrisation of analysis attributes Portfolio-driven data model Full Repricing Incorporate new instruments and pricing models Create and adapt instrument and model attributes Analyses integrate different risk types Traceable calculation processes with user intervention Market modeling
Clear and concise drill-down reporting Web reports Data Management
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Design specifications
All major analytical techniques, within a
single environment No need to jump between specialist packages..
Any number of different analyses can be
performed in a single run.
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Design specifications
Full parametrisation of analysis attributes Users must be able to customize the
specifications of the various parts of the riskanalysis process.
Users must be able to mix and match different
specifications as needed for different analysis
projects.
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Design specifications
Portfolio-driven data model No fixed data model.
Ability to configure data model from an existing
database schema.
Ability to process data as is.
Ability to pull data together from numerous
heterogeneous data stores.
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Design specifications
Incorporate new instruments and pricingmodels
New instrument types configured easily.
User selects and installs pricing models.
No restrictions on pricing models.
Any number of vendor supplied or user written
pricing libraries can be installed.
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Design specifications
Analyses integrate different risktypes
Market risk and credit exposure handledwithin the same framework.
A unified and logical architecture:
Consistent use of data definitions,
calculation methods, representation offigures,
(Un)conditional risk measures
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Design specifications
Trackable calculation processes with user
intervention
Not a black box.
User can define and control key calculations.
Intermediate calculations can be stored and
examined for additional processing or
validation checks.
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Design specifications
Market Modeling
Powerful nonlinear statistical modeling features
can be used to specify and fit models of market
dynamics.
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Design specifications
Clear and concise drill-down reporting All analytical results can be broken down oraggregated.
You can slice and dice the risk measures for aportfolio across any set of dimensions that you
choose to define (by region, counter-party,
instrument type, ).
Marginal and Conditional risk measures.
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Design specifications
Web reports
Web ServerJava-enabledweb browser
Risk Server
HTTP
HTTP
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Design specifications
Data Management
A true risk management solution has extensive
possibilities for data access and data processing.
Must include extensive back-end data warehousing
software.
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True differentiators...
Openness, extensibility, flexibility
Data management
Clear and concise reportsState of the art risk engine
Market modeling
leading to true business advantages
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To manage a business well is to manage its future; andto manage its future is to manage information.
Marion Harper
Managing risk is managing the future.Rik van de Weerthof
+
=
Managing risk = Managing information.
Some quotes...
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time-oriented data
coming from multiple applications
according to subjects meaningful to the business
driven by the need to inform decision makers
Technology helps organising
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Operational Systems
Get data IN
Large volume ofSimpletransactions
Staticapplications
Automates Routine Tasks
Business Intelligence Systems
Get information OUT
Smallnumber ofComplexqueries
Dynamicapplications
Enables Creativity
Technology can fulfill anoperational or a business
intelligence role
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Product
Distribution
Credit rating
Geographical
Time (to maturity)
Counter party Type
Loans portfolio
Option book
Equity book
Ctpty
Ctpty Type
All Ctpty
>A
B-A
C-B
Junk
10 yr
Technology organises theinformation dimensions
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Drill down
Technology gives insight in
multidimensionality
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Technology gives insight in
multidimensionality
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The Power to Know RISK
R I S KD I M E N S I O N STM