Data-driven risk control: does your system check limits in real-time?

Data-driven risk control: does your system check limits in real-time?

Two decades ago checking limits overnight was good enough: a smaller number of desks, simpler valuation models and a decreased appetite for operational and cost efficiency allowed for limit control processes to be executed in batch mode overnight.

Over the past few years the industry has changed, ushering in more complex products and risk engines, higher trading volumes and narrower margins. The regulatory framework also requires banks to control limits intraday. If you want to remain ahead of the curve and gain a competitive advantage then the limit system must also support What-If simulations and pre-deal checks.

 

The move towards real-time risk

ActiveViam’s ActivePivot and ActiveMonitor technologies can help smooth over the transition from end-of-day batch monitoring to real-time on a source-by-source basis.

Once your system has published data as incremental trades or new positions update, ActivePivot will capture “live” data streams and store them in-memory at the most granular level. ActiveMonitor will subscribe to updates in utilizations and trigger notifications, reports or other desired workflow as demonstrated in the diagram below:

 

 

To shorten the feedback cycle and allow desks to act on limit events in parallel, your global risk control system should reflect risk figures as soon as they are produced, consolidating multiple data sources. For example, risk management in your organization might look like this – vanilla equity risk is published near real-time by one of the front-office systems, rates desks risk numbers are delivered every few minutes by another system, while the exotic portfolio is evaluated overnight and CVA sensitivities are refreshed only once a week. Some of the areas might be behind others due to systematic data quality issues, manual corrections and lengthy sign-off processes.

Let’s look at the figure below as an example:

  • Limits have been checked for the “Equity flow trading” and “Exotic options” area, with a breach identified (red)
  • “FX Options” area is still pending a limit check (gray)
  • “Rates trading” utilization is above the limit based on the preliminary numbers – the system brings up an early warning (orange).

 

The move towards real-time risk

 

You can also run comparative What-If simulations on new trades or a single trade, or on the movement of portfolios from one book to another to see how the change would affect these predefined limits. Examine how a group of potential transactions will impact limits and create a workflow for approval before the trades are executed.

 

Actionable business intelligence

Acceleration of the limit control process is achieved through real-time limit checks and alerts, streamlining information sharing with risk owners and automation of the limit control workflow.

ActiveViam’s flexible analytics platform enables users to focus on event mitigation and provides collaboration tools that streamline information sharing with risk owners.

Risk analysts can create specific views to identify the root cause of a breach, attribute changes to the key drivers and share the views with key stakeholders, allowing them to respond to the limit event as soon as possible.

In the example below, a credit spread limit has been breached and an additional CVA charge will be incurred.

 

Actionable business intelligence

 

Stronger governance

Automating the previously labor intensive limit control processes allows users focus on mitigating limit event impact and benefit from the stronger governance around the process.

All user actions and relevant risk information can be persisted and are available for limit statistics analysis and audit.

Please contact us at sales@activeviam.com to learn more about real-time limits monitoring.

 

To learn more, check out the ActiveMonitor Datasheet and our Market Risk Accelerator White Paper.

Related resources

eBook – Product Control: Explain and Reconcile PnL in a Single System
ActiveViam’s Market Risk Accelerator
ActiveMonitor
FRTB Accelerator
The Fundamental Review of the Trading Book (FRTB) – Tackling A New Approach For Market Risk
ActivePivot Under the hood
Managing business performance and detecting outliers in financial services
ActiveLedgers – Facilitating and shortening the accounting period close
Collateral Optimization
Optimizing Liquidity Management
Real-time Credit Value Adjustment
eBook – Intraday Liquidity Management
eBook – Liquidity Management

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