1. © Copyright ACTUS 20131Date: 10.06.2016 ACTUS: A Data Standard That Enables Financial Analysis Based on Granular Transaction and Position Data By Willi Brammertz Wolfgang BreymannAllan I. Mendelowitz Society for Economic Measurement July 22, 2015 Paris, France

2. © Copyright ACTUS 20132Date: 10.06.2016 Willi Brammertz is Chairman of the ACTUS Financial Research Foundation willi@brammertz-consulting.ch Wolfgang Breymann is Professor, Zurich University of Applied Sciences bwlf@zhaw.ch Allan I. Mendelowitz is President of the ACTUS Financial Research Foundation amendelowitz@yahoo.com

3. © Copyright ACTUS 20133Date: 10.06.2016 OUTLINE The importance of a data standard for risk management and financial regulation The ACTUS approach Analytical examples enabled by ACTUS The role of modern IT technology

4. © Copyright ACTUS 20134Date: 10.06.2016 THE IMPORTANCE OF A DATA STANDARD FOR RISK MANAGEMENT AND FINANCIAL REGULATION

5. © Copyright ACTUS 20135Date: 10.06.2016 The importance of data standards A data standard in itself is not important. Important is what data standards make possible. Examples: o GAAP accounting enables publicly traded companies to report financial data in accordance with SEC regulations o Global LEI makes possible unique and reliable identification of counter parties. o Legal standard for contractual terminology makes it possible to enter into legally binding agreements with a common understanding.

6. © Copyright ACTUS 20136Date: 10.06.2016 The importance of data standards (continued) Existing standards for derivatives are linked to the ability of financial firms to efficiently trade derivatives on a large scale. Examples: o Master agreements for traded derivatives provide a representation of the legal terms of standard contracts that facilitate trading. o Standards like FpML and FIX provide a data transmission protocol for contract terms that make possible automated clearing and settlement for large traded volumes of instruments. There is no data standard that supports current or forward- looking financial analysis.

7. © Copyright ACTUS 20137Date: 10.06.2016 Regulators collect a lot of data, however, most is accounting-based. Accounting is not a risk metric. Indeed … o Accounting reports are not timely and are backward looking. o Accounting standards are not applied consistently to financial data (i.e. FAS133 and fair-value accounting). o Inconsistent firm-level application of accounting standards make meaningful inter-bank comparisons (e.g. results of capital stress tests) not possible. o Aggregation of accounting data hides important details needed for financial analysis. o Liquidity is essential to the stability of financial firms. However, accounting data do not support liquidity analysis. o Accounting also does not support dynamic value and income analysis. Risk Managers and Regulators need a data standard that supports the full range of financial analysis critical to understanding the health of financial institutions and markets. What is the regulator’s interest in a data standard?

8. © Copyright ACTUS 20138Date: 10.06.2016 The problem continues … Even recent legislation has not fixed the problem. o The Dodd-Frank Act pushed the clearing and settlement of swaps onto clearing houses and required the reporting of swaps data to Swaps Data Repositories (SDRs)  Vast amounts of data have been reported to the SDRs  Feb. 10, 2014 the CFTC’s TAC held a public hearing in which CFTC executives reported that the data could not be analyzed The reporting requirement was created before there was a proven data standard that would support analysis.

9. © Copyright ACTUS 20139Date: 10.06.2016 The importance of a data standard for financial analysis Just collecting data is not sufficient for effective risk management or regulatory oversight. In order to independently assess the risk of financial institutions and markets, risk managers and regulators must be able to analyze the collected data. Such independent capability requires a data standard that supports current and forward-looking financial analysis. A data standard for financial instruments that supports such analysis must be able to generate the key input for financial analysis: Expected State-Contingent Cash Flow. Because there was no such standard, ACTUS was initiated to fill this gap.

10. © Copyright ACTUS 201310Date: 10.06.2016 Requirement for a data standard ACTUS is intended to satisfy the following objectives: o Represent all financial obligations o Because not all financial data can be meaningfully aggregated, ACTUS is being created as a standard at the level of granular transaction and position data. o Clearly and precisely represent the binding contractual terms in mathematical/algorithmic form. o Include the ability to flexibly model the (stochastic) risk factors according to the need and/or judgment of the analyst. o Generate in a consistent way the key inputs for financial analysis.

11. © Copyright ACTUS 201311Date: 10.06.2016 THE ACTUS APPROACH

12. © Copyright ACTUS 201312Date: 10.06.2016 How to think about the problem The financial analysis production line: The basic building blocks of the financial world are the financial contracts. State of the Risk Factors Financial Contracts Expected State Contingent Cash Flows Financial Analysis Results

13. © Copyright ACTUS 201313Date: 10.06.2016 We still have a problem … Financial contracts are legal documents written as words. Master agreements are a type of standardized contract: they include basic contract provisions without specific contract terms such as principal amount, dates, … Financial Contract data are typically terms of a written contract such as: Principal, interest rate, type of amortization schedule, Day count method, payment schedules, etc. Such data is not readily subjected to typical financial analysis.

14. © Copyright ACTUS 201314Date: 10.06.2016 How to think about the problem Add the missing link Algorithms are the mathematical representation of the state-contingent actions embodied in the words of the legal contract. State of the Risk Factors Expected State Contingent Cash Flows Financial Analysis Results

15. © Copyright ACTUS 201315Date: 10.06.2016 Contracts, algorithms and Cash flow patterns Financial contracts are the deterministic component of financial markets defining the legal obligations of the parties. The algorithms are the mathematical representation of the obligations embodied in the legal agreements The number of algorithms needed to represent all financial instruments is limited: Despite the large number of different financial products, many differences fall away when the focus is on cash flow Analysis: With a consistent, tested and validated algorithmic representation of financial contracts, analysts are free to bring any analytical approach/model to bear

16. © Copyright ACTUS 201316Date: 10.06.2016 Market Risk Counterparty Risk Behavior Risk Contracts Inputs e1e1 e2e2 e3e3 e n-1 enen …. t Contract Events cfl 1 cfl 2 cfl n …. t Expected Cash-Flows LiquidityValueIncome Analytical Results

17. © Copyright ACTUS 201317Date: 10.06.2016 ACTUS Financial Research Foundation ACTUS is building a set of 30 algorithms, which we call Contract Types (CTs), they will Represent at least 97 % of the financial market Generate state contingent cash flow with great precision Be open source and available to all from the not-for- profit ACTUS Financial Research Foundation and the ACTUS Users Association ACTUS has benefited from the financial support of: The Alfred P. Sloan Foundation Deloitte Consulting Stevens Institute of Technology Zurich University of Applied Sciences Brammertz Consulting GmbH

18. © Copyright ACTUS 201318Date: 10.06.2016 Data and algorithms: Example of variable annuity Payments must be calculated using data and the algorithms Using the Annuity CT, expected payments of interest and principal need a lot of “contract data”: Interest rate, day count method, business day convention, rate reset cycle, spread, principal amortization,] notional, etc.

19. © Copyright ACTUS 201319Date: 10.06.2016 Example: Annuity CT

20. © Copyright ACTUS 201320Date: 10.06.2016 ANALYTICAL EXAMPLES ENABLED BY ACTUS

21. © Copyright ACTUS 201321Date: 10.06.2016 Using ACTUS for Firm-Level Liquidity Analysis 1. Represent the components of a firm’s balance sheet in ACTUS. 2. Use ACTUS CTs and the current state of the risk factors, including implied forward rates, to generate expected state-contingent cash flows of all the contracts for future periods. 3. Aggregate the individual expected cash flows for each future period. 4. Represent marginal and total liquidity in both tabular and graphical form. 5. Identify periods of vulnerability due to illiquidity in financial markets. 21

22. © Copyright ACTUS 201322Date: 10.06.2016 Financial Analysis: Liquidity (Cash Flows) 22

23. © Copyright ACTUS 201323Date: 10.06.2016 Using ACTUS for Stress Tests 1. Define the universe of stress scenarios. In the example that follows we focus on interest rate shocks. 2. Stress test for the impact on value. a.Compute the portfolio or firm value for the baseline scenario. b.Compute the portfolio or firm value for each stressed scenario. c.Compute the delta value compared to the baseline value for each scenario. d.Aggregate subgroups to represent the distribution of delta values as a histogram. 23

24. © Copyright ACTUS 201324Date: 10.06.2016 Financial Analysis: Stress Test Scenario Scenario 1 Scenario 2 Scenario 3 24

25. © Copyright ACTUS 201325Date: 10.06.2016 Financial Analysis: Risk 25

26. © Copyright ACTUS 201326Date: 10.06.2016 Using ACTUS for Stress Tests Stress test for liquidity with a network of financial institutions. o Decompose cash flows of each financial institution into bilateral cash flow obligations. o In a network of financial institutions the decomposed bilateral cash flows reveal bilateral imbalances that highlight risks of cascading failures. Stress test for credit risk can be done in a similar way. 26

27. © Copyright ACTUS 201327Date: 10.06.2016 Interactions in the Banking Network With the balance sheets of all institutions represented in ACTUS we can for the first time put real cash flows on the lines linking the nodes of the network. When conducting stress tests this capability highlights imbalances and the risks of cascading failures. 27

28. © Copyright ACTUS 201328Date: 10.06.2016 THE ROLE OF MODERN IT TECHNOLOGY: THE CAPABILITY TO TRANSMIT, STORE, AND ANALYZE HUMONGOUS VOLUMES OF DATA MAKES IT FEASIBLE TO BASE THE STARTING POINT FOR ALL FINANCIAL ANALYSIS AT THE LEVEL OF GRANULAR TRANSACTION AND POSITION DATA.

29. © Copyright ACTUS 201329Date: 10.06.2016 How modern IT capabilities are transforming science … “Old” science is being steadily transformed into “big” science through the use of growing IT capabilities (high- performance computing, nearly unlimited internet bandwidth, very low-cost storage). o Examples are:  Particle physics (1000 physicists work on CERN experimental data)  Meteorology (The entire globe is modeled algorithmically)  Cosmology (We can analyze data from the time of the big bang.)  Biology (Decoding genomes)

30. © Copyright ACTUS 201330Date: 10.06.2016 … and business The business world is being transformed as well. o Examples:  Retailing  Logistic networks and distribution  Complex manufacturing  Internet business Important parts of finance are left out, especially risk management and regulation. In a complex system with multiple interconnected parts a data standard is essential.

31. © Copyright ACTUS 201331Date: 10.06.2016 The potential of IT technology for financial analysis Financial research, risk management, and regulation can be transformed similarly to science and business by taking full advantage of today’s IT potential.

32. © Copyright ACTUS 201332Date: 10.06.2016 Summary Current IT technology provides the capability to analyze humongous amounts of data – including granular data from individual financial institutions and the entire financial system – in a fast and flexible way. However, consistent financial analysis of institutions and the entire financial system is not possible without a fit-for- purpose data standard for granular transaction and position data. At present ACTUS is the only proposed standard that supports such analysis.

33. © Copyright ACTUS 201333Date: 10.06.2016 Building The Future of Financial Data www.projectactus.org Visit our Website for: An introduction to the ACTUS Standard Descriptions of each Contract Type The ACTUS Data Dictionary The ACTUS Academy with online educational lectures on how to use ACTUS Relevant documents Access to the first 10 programmed algorithms, so that anyone can take ACTUS for a test drive.

34. © Copyright ACTUS 201334Date: 10.06.2016 Building The Future of Financial Data Questions, Comments, and Offers of financial support are welcome... Thank You