how smart contracts can revolutionize risk management

1

How Smart Contracts Can Revolutionize Risk Management

Dr. Willi Brammertz

MD Ariadne

Global Association of Risk

Professionals

June 2016

2

The views expressed in the following material are the

author’s and do not necessarily represent the views of

the Global Association of Risk Professionals (GARP),

its Membership or its Management.

© Copyright ARIADNE 2016 3June 16

Financial contracts today

Endre vullumsandio dion endipsummy nos dolobore vel ut alis

amet autem dionseq uismodigna feumsan dionse dolor

ullandre magna feuipsummy nullum ad tin ….

Bank shall pay the sum of __________ USD on __________ (date)

to ______ (obligor). Obligor will pay an interest of ____ % on a

semi-annual basis and repay the full amount in ____ years.

Date, Signature

2013.01.011000

Mr. Smith 103


The real Agreement

Contracts and Algorithms


Another Agreement


Financial contracts today

Endre vullumsandio dion endipsummy nos dolobore vel ut alis

amet autem dionseq uismodigna feumsan dionse dolor

ullandre magna feuipsummy nullum ad tin ….

Bank shall pay the sum of __________ USD on __________ (date)

to ______ (obligor). Obligor will pay an interest of ____ % on a

semi-annual basis and repay the full amount in ____ years.

Date, Signature

2013.01.011000

Mr. Smith 103


ACTUS Algorithms

Example: Interest CFL Calculation

public class InterestPaymentEvent […]{

[…]

/** calculate accrued interest **/

yearFraction = dayCount.yearFraction(

states.getLastEventDate(),

super.getCalculateDate());

states.setTimeFromLastEvent(yearFraction);

nominalAccrued =

accrualCalculator.nominalAccrued(states) +

states.getNominalAccrued();

/** update state variables **/

[…]

/** set event value (interest cash flow) **/

super.setEventValue(

(1 + scalingEffect.getInterestPayments() *

(states.getScalingMultiplier() - 1)) *

nominalAccrued);

}

public class […] AccrualCalculator {

[…]

/** calculate accrued interest **/

public double

nominalAccrued(StateSpace states) {

return

states.getNominalValue() *

states.getTimeFromLastEvent() *

states.getNominalRate();

}

}

This is the true and exact definition

of the financial contract


Standard is Possible

Implicit Standard Exists

+cfl1 +cfl2 +cfln….

t

Expected

Cash-Flows-cfl1 -cfl2 -cfln….

t

Expected

Cash-Flows


Analysis

and Cash-Flow

Financial Analysis i = f(E[Cash-Flows],,,)


Ancient Financial

Algorithms


Effect of Central

Data Stores


t

Expected


t

Expected

Cash-Flows

Data Store

Value

Balance Sheet

Data (Parameters

OF Algorithms)

„Reinject“ AlgorithmsAdd Risk Factors

Data AND

Algorithms

Analysis

Level

Transaction

Processing


ACTUS and

Data Stores


t

Expected


t

Expected

Cash-Flows

Add Risk Factors

Data and Algorithms

Unstandardized

Data Store

ACTUS DD

ACTUS CFGAData and Algorithms

Standardized

Analysis

Results

=

=


Why Can we be Sure?

-cfl1 -cfl2 -cfln….

t

Expected

Cash-Flows

Data Store

ACTUS DD

ACTUS CFGA

=


Smart Contract

Analogy with DNA

DATA ALGORITHMS


The Model

Market Risk

Factors

Credit Risk

Factors

Behavior Risk

Factors

Risk Factors

Inputs

e1 e2 e3 en-1 en….

t

Contract

Events

Liquidity ValueIncome

Analytical

Results

Expected

Cash-Flowscfl1 cfl2 cfln

t

….

Financial Contracts

(Data + Algorithms)

Contract

Inputs


ACTUS Contract Types

Overview, State of Development

* Definitions and explanations to the Contract Types may be found in the «CT-Description» Excel sheet.

ACTUS

Contract Types

Basic Combined

MaturitiesCredit

Enhancements

Non-

Maturities

Securiti-

zation

Credit

DerivativesOptionsSymmetric

CDSWPPAM

ANN

NAM

LAM

ANX

NAX

LAX

CLM

PBN

CSH

UMP

STK

COM

CEG

CEC

SWAPS

SWPPV

FXOUT

FUTUR

OPTNS

CAPFL

BNDCP

BNDWR

CFXOP

IRXOP

STXOP

CMXOP

FXXOP

SCRMR

SCRCRTRSWP

CLNTE

completed

in planning

planned


0

1E+13

2E+13

3E+13

4E+13

5E+13

6E+13

FIX

ED

IND

EX

-LIN

KE

D

ZE

RO

CO

UP

ON

FLO

AT

ING

NO

NE

ZE

RO

CO

UP

ON

FIX

ED

IND

EX

-LIN

KE

D

FIX

ED

IND

EX

-LIN

KE

D

ZE

RO

CO

UP

ON

FLO

AT

ING

NO

NE

ZE

RO

CO

UP

ON

FLO

AT

ING

NO

NE

ZE

RO

CO

UP

ON

FLO

AT

ING

ST

EP

PE

D

FIX

ED

IND

EX

-LIN

KE

D

ZE

RO

CO

UP

ON

FLO

AT

ING

ST

EP

PE

D

ANNUITY BULLETConfidential

INDEX LINKEDIRREGULAR NONE OTHERPERPETUALSERIALSTRUCTURED

Total

ANNUITY FIXED

ANNUITY FLOATING

ANNUITY INDEX-LINKED

ANNUITY STEPPED

ANNUITY ZERO COUPON

BULLET FIXED

BULLET FLOATING

BULLET INDEX-LINKED

BULLET NONE

BULLET STEPPED

BULLET ZERO COUPON

Confidential Confidential

INDEX LINKED FIXED

INDEX LINKED FLOATING

INDEX LINKED INDEX-LINKED

INDEX LINKED ZERO COUPON

IRREGULAR FIXED

IRREGULAR FLOATING

IRREGULAR INDEX-LINKED

World Bond Portfolio

Coverage with PAM (Q1 2015)


ACTUS and

Ariadne Software

Additional Reports

e.g. Book Value, FTP,

Monte Carlo, etc.

Market Risk

Factors

Credit Risk

Factors

Behavior Risk

Factors

e1 e2 e3 en-1 en….

t

cfl1 cfl2 cfln

t

….

Contracts

Liquidity ValueIncome


Target of ACTUS

Faithful representation of 99+% of all

financial contracts

We produce a first set of 32 self-executing

financial contracts

To become THE financial standard for the

analytic use case


Current Actions of ACTUS

Strong presence at very large central

banks

Proof of concept at

Very large Swap Custodian

Very large Central Bank

Officially listed as ISO 20022 RMG member


ACTUS is Open Source

Homepage: http://www.projectactus.org

Demo: http://www.projectactus.org/ACTUS/contractCalculator

http://www.projectactus.org/

http://www.projectactus.org/ACTUS/contractCalculator


Benefits

Clear separation of facts and assumptions

Unifying different views

Economic

Accounting

Regulatory

Smart contract: Quality increase / cost reduction:

Financial analytics

Unifying analytics and transaction processing (Full STP)

Works under centralize or decentralized architecture

Basis of systemic models

Basis of smart regulation


Financial Contracts

Standard

Basic Complex

Non Standard

Approx-imated

Individual

Smart Contract

Smart Regulation

Capital Charge

Low High

This constitutes a capital charge for model risk!


Find more information about

ACTUS here:

www.projectactus.org

http://www.projectactus.org/


Legal Disclaimer

© Copyright Ariadne Business Analytics 2016

All rights reserved.

You are not permitted to create any modifications or

derivative works of this presentation or to use it for

commercial or other public purposes

without the prior written permission of Ariadne Business

Analytics AG.

26

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r i s k a w a r e n e s s ®

Global Association of

Risk Professionals

111 Town Square Place

14th Floor

Jersey City, New Jersey 07310

U.S.A.

+ 1 201.719.7210

2nd Floor

Bengal Wing

9A Devonshire Square

London, EC2M 4YN

U.K.

+ 44 (0) 20 7397 9630

www.garp.org

About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make

better informed risk decisions. Membership represents over 150,000 risk management practitioners and researchers from banks, investment management firms, government agencies,

academic institutions, and corporations from more than 195 countries and territories. GARP administers the Financial Risk Manager (FRM®) and the Energy Risk Professional (ERP®)

Exams; certifications recognized by risk professionals worldwide. GARP also helps advance the role of risk management via comprehensive professional education and training for

professionals of all levels. www.garp.org.

26 | © 2014 Global Association of Risk Professionals. All rights reserved.

how smart contracts can revolutionize risk management

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