whiTe paper

Real-Time Risk Monitoring

Timely Monitoring and Management of Positions/Exposures
Credit Risk Market Risk Compliance Liquidity Risk

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Three forces the heightened sense of risk, the limitations of existing systems, and new regulatory pressures are forcing firms to look for new approaches to managing risk.

SiTuaTion The credit crisis is demonstrating to clients and shareholders (and taxpayers!) that financial institutions had inadequate levels of controls for managing risk. Regulators have come under scrutiny for the effectiveness of their controls and are now engaged in exploring and defining new measures to combat the crisis and prevent a recurrence. Governments faced with the toughest economic challenges since WW2 are doing everything in their power to stabilize the global economy by supporting financial institutions with liquidity and applying pressure to ensure a restart of the credit flow. Firms that engage in financial trading are exposed to counterparty risk (i.e., credit risk), market risk, and operational risk. While many firms have invested in tools to manage market risk, tools for managing credit risk tend to be less sophisticated. Whats more, the limitations of both types of tools have become apparent in the current market conditions: the information they provide is not timely enough and is too fragmented; it doesnt provide a real-time consolidated view of the entire trading operation. These three forces the heightened sense of risk, the limitations of existing systems, and new regulatory pressures are forcing firms to look for new approaches to managing risk. challenge Traditionally, risk systems have not been seen as first-line mission-critical and hence have typically not received the level of attention and investment that is needed for optimal control. Usually they are based on dated technology that is not capable of delivering the consolidated real-time information and controls that are so important under the current trading conditions and in some cases are being mandated by new regulations. It is also a time when budgets are constrained and large-scale infrastructure-renewal projects the traditional approach to addressing the shortcomings of current systems are not tenable. The financial industry needs a new approach to consolidating, monitoring, and managing risk employing the best of new technologies that have become available in a way that does not require the wholesale replacement of existing systems. This new approach needs to provide: Speed: In fast moving, highly volatile markets and economic conditions that make counterparty risk very real and dynamic, a trading operation cannot wait until the next day to understand what its exposure is. Traditional systems that rely on lengthy overnight global batch processing to consolidate and net-out positions and exposures simply arent good enough. Consolidated, Enterprise-level Insight: Most larger firms struggle with the problem of having multiple disparate trading and risk management systems systems that werent designed to share information with each other. Normalizing and consolidating information across these systems can be difficult, but it is essential for seeing the big picture. Data Availability and Quality: The traditional silo-based approach that separates the management of market risk from credit risk and further separates compliance from both often means that each group works with different sets of data that also may be of different quality. The result is data that is delayed. Different reports present different irreconcilable views of the information, making it difficult to understand the real risk position across the firm. Adaptability and Ease of Deployment: The high cost of change rules out big projects that require large budgets and lengthy deployment cycles. Any new stress scenarios require quick response times often in hours rather than days. New tools need to integrate easily with existing systems and be adaptable to rapidly changing business needs.

SoluTion Sybase has leveraged state-of-the-art Complex Event Processing (CEP) technology to develop a Real-time Risk Monitoring framework that addresses these challenges.

Prices

Data Sources
Data cleansing & normalization
Trade flow Market data EQ FI DER FX Commodities Treasury Collateral Sec lending & borrowing Legal & netting agreements Static, reference, & rating data Risk factor data Internal Risk Ratings (IRR) Limits

Front Office

Sybase RAP: Real-time monitoring, analysis, reporting, and alerting

Real-time Risk Monitoring Framework

Market Risk
P&L MTM
Limit managment Credit Simulation engine Risk Stress testing Concentration Exposure risk Issuer risk Concentration risk LG, PD, Interest rate risk Collateral conc. Availability checking

Market Risk

Scenario simulation, stress testing Pre-deal checking in real-time Exposure & concentration risk Asset correlations, close out risk Collateral concentration Drill down capabilities

Risk based asset pricing Optimization of regulator capital (with economic capital)

Credit Risk

Reference Data

Limit monitoring, risk aggregation, availability checking, pre-deal checking, reporting

Scenario simulation, stress testing Pre-deal checking in real-time Exposure & concentration risk LGC, PD, EAD, asset correlations Collateral concentration, recovery limit management Drill down capabilities

Achieving regulatory compliance Move into active portfolio management Risk based asset pricing (loans, credit VaR)

Figure 1: Real-Time Risk Monitoring Framework

The key benefits of the Sybase framework over traditional systems include: Real-time, continuous monitoring, analysis, and alerting: No need to wait for overnight consolidation and batch computations. Data is always current and always available. Enterprise-wide view: Consolidation across systems, asset classes, departments and geography. Avoid the fragmented view that each trading system provides. Roll-up and drill-down: Aggregate the data along any number of dimensions. View at any level, with the ability to drill down all the way to individual transactions. Changes can be easily applied to all dimensions and hierarchies in real time, with the ability to use the changed logic immediately. Scenario simulation modeling (liquidity risk) of pre-defined situations such as extreme events or special market conditions. Ease of changing definitions, powerful simulations in fractions of seconds. Limit management in real time: Set risk-weighted, rule-based, non-linear limits at multiple levels of the data hierarchy and flag exposures in real time when limits are reached or exceeded. Limit hierarchies can be changed in real time without any restart or overnight run. All exposures and concentrations in one view, business section-wide or globally: Slice, dice, roll up, or drill down as the situation requires, enabling informed decisions and rapid response to changing market conditions. Immediate response allows for corrective action before its too late. Pre-trade approval: The system can automatically check an incoming order to confirm sufficient capacity by checking current positions against limits before approving, denying, or restricting the order. Monitor trading patterns in real time: Generate alerts or impose restrictions when predefined patterns are observed. Non-intrusive aggregation with existing systems: The Sybase system can accept data in native format from any number of different systems, normalizing and cleansing/validating the data within the Sybase consolidation engine. The Sybase server can accept live data streams from systems that can provide them either directly or via a message bus, and can load data from databases and files for systems that cant produce live output streams. Sybase has a variety of connectors for integration. If theres a way to get the data out of the existing system, it can be consolidated in Sybase.

Figure 2: Risk Concentration by Sector

Figure 3: Trading Operation Risk Exposure to Counterpart Country

Technology The Sybase Real-Time Risk Monitoring Framework is implemented on Sybases state-of-the-art Complex Event Processing (CEP) technology. Sybase CEP technology is designed for continuous analysis of rapidly changing data, delivering Continuous Intelligence to banking and other financial services firms across all financial products. Sybase CEP is event-driven technology that processes data as quickly as it arrives. Unlike a relational database that stores the data first and then runs queries to analyze the data, the Sybase dataflow architecture passes the data through the data model, continuously updating all views and checking all rules in order to deliver immediate insight and enable instantaneous response. Sybase CEP technology is designed for high performance. It is capable of very high throughput (message rates) and very low latency (lag time from the arrival of new information until the impact is evident to users and/or responses are triggered). The Sybase CEP engine processes data according to a flexible data model. The Sybase Platform includes high level modeling tools that are used to express the business logic that goes into the data model. The model contains all the business rules needed to normalize, cleanse, and consolidate the data, along with the rules to watch for conditions that demand a response.

A unique aspect of Sybases CEP technology is its interactive roll-up and drill down capabilities. Sybase RAP works in an integrated fashion with live data that is being continuously updated by the CEP engine. Users have a variety of front end options for analyzing and reporting. These include: Standard off-the-shelf tools: Microsoft Excel, reporting tools, BI tools, and more. The Sybase Portal: a flexible data portal delivering live information to end users via a web browser The Sybase Dashboard: a customizable real-time dashboard tool for monitoring streaming datas Custom applications that connect to the Sybase servers via APIs or via standard query interfaces: ODBC, JDBC, ODBO

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