Banking and Trading Book Integrated Risk Management

Banking and Trading Book Integrated Risk Management
1. The purpose of this presentation is to explain what we do at SunGard and why. David Brathwaite, CFA Bill Collette Cristóbal Conde is the chief operating officer and a member of the Board of Directors of SunGard Data Systems Inc., and is responsible for managing all of SunGard’s businesses. Prior to his promotion to COO in August of 1999, Mr. Conde headed up SunGard’s Trading Systems Division, which he started in Under Mr. Conde’s direction, the Trading Systems Division expanded to four Groups comprised of twenty-two operating units employing over two thousand staff. These businesses primarily focus on software systems that perform trading and risk management of financial instruments for banks, brokerage firms, and corporations. Prior to joining SunGard, Mr. Conde co-founded Devon Systems International, Inc., which was acquired by SunGard in At the time, Devon focused on providing systems for the interest rate and currency derivatives markets. Mr. Conde serves on the Board of the International Association of Financial Engineers and The Fisher Black Memorial Foundation. © Copyright SunGard Data Systems, Inc. (“SunGard”), This document and the software described within are copyrighted with all rights reserved. No part of this document may be reproduced, transcribed, transmitted, stored in an electronic retrieval system, or translated into any language in any form by any means without the prior written permission of SunGard. SunGard makes no warranties, express or implied, in this document. In no event shall SunGard be liable for any indirect, special, incidental or consequential damages arising out of use of this document or the information contained herein.

Objectives To provide an Asset Liability Management View of Integrated Risk Management To Provide a Theoretical View of Integrated Risk Management To Present a Proven Solution Set which Achieves Integrated Risk Management

Agenda Background Best Practise Techniques Risk Profile
Integrated Risk Management SunGard’s Integrated Solution Questions and Answers David Brathwaite Bill Collette

Integrated Risk Management SunGard’s Integrated Solution Questions and Answers

Why Asset/Liability Management?
Increased regulatory requirements Better understanding of risks inherent in the Balance Sheet Capacity to advance beyond Gap Analysis and Net Interest Income Simulation Find opportunities and avoid pitfalls

Introduction - ALM & Risk Management
1960/70’s - Treasury Management Treasury/Dealer Responsibility - No Centralised Risk Management Little or No Competition for Financial Institutions 6:3:3 Risk Management Process, GAP & Stable Deposit Base 1980/90’s Asset/Liability Management Globalisation & Bank Centralisation/Focus of Risk Management Income Simulation, Economic Value of Equity, VaR/Total Return Increasing Competition for Financial Institutions

Introduction - ALM & Risk Management
The Next Millennium ’s A/L Management ALM Risk Focus on Behaviour Risk Analysis Not Client/Product Contractual Dates - Optionality Accounting Integrated - Enterprise-wide Risk Management Total Return FAS 133 Risk Accounting/Measurement Total Competition in the Financial Markets Financial Institutions, As We Know Them, Disappear

ALM: In the Beginning Development of ALM
Stable Rates and Generous Margins Regulatory Requirements Focus Cost Center Then Business Unit Ethos Centralised & Isolated Process From Business Units With the recent financial problems across markets, it has become evident that departments and managers responsible for financial control have often been unaware of some of the risks to which their institutions are exposed. As a result, the sound measurement of financial risks and methods for their effective management have become an absolute necessity. Along with the new awareness of the importance of risk management, the task of maintaining the stability of national and international banking systems has come to require a revision of existing regulations as well as the dispositions of new norms for the banking sector working towards furthering the establishment of integrated risk management approaches. Risk management within a financial institution was initially viewed as an area created solely to comply with regulatory requirements but which was purely a cost center as there did not seem to be any use for it otherwise. It was a unit which functioned completely as a separate and isolated unit which generally nobody understood its functions. With time, this perspective has changed as experience has proved that risk management within an institution is vital and correctly implemented leads to loss prevention as well as balance sheet restructuring so as to maximize returns.

ALM: Today’s Priority High Impact Managerial Process
Measurement and Management of Potential Loss Value at Risk Limits: Positions and Potential Losses Stoploss Capital At Risk Management Pro-active ALCO Integrated Risk Management Asset / Liability Management is today a high impact field which has taken the forefront in the financial sector. Of special interest is the improvement of systems and techniques for risk quantification. The rapid progress of information technologyin recent years has brought new risk measurement models to aid in the measurement of market risk. The most widely accepted of these is the Value at Risk model. VaR is the maximum loss that can occur in thevalue of a portfolio having a certain investment horizon under a certain probability. This methodology permits comparison of the market risk of different investment instruments so that portfolio performance can be evaluated in terms of the risks undertaken. This method combined with scenario analysis is used to determine the institutions value or capital at risk for a given portfolio under different interest rate or other macroeconomic conditions. By comparing market values and calculating gains and losses, the value at risk is evaluated. Summing this value for all transactions across the balance sheet, the company-wide value at risk is computed. This value is then evaluated versus pre-established company loss limits to determine if the total value at risk is within some tolerable range. This evaluation must be performed as often as the portfolio time horizon spans and should include periodic stress tests where extreme macroeconomic shocks are taken into consideration. Ideally, a pro-active risk management approach will be overseen by a highly involved Asset Liability Committee (ALCO) where risk management policies, methodologies and analytical results as well as stress tests are evaluated on a usual basis. Asset / Liability Management aims to measure and manage all the risks to which an institution is exposed such as liquidity, interest rate, exchange rate, credit, operational and legal risk. Summing up potential losses due to all these factors into a tolerable value or capital at risk concept is the idea behind integrated risk management. Credit Operations Legal Liquidity Interest Rate Exchange Rate

Risk Silos or Firm Wide Risk Management
Market Risks Liquidity Risk Interest Rate Risk Currency/Commodity Risk Correlation Risk Price/Position Risk & Trading Book VaR Equity Risk Business/Strategic Risk The Interface with Planning, Budgeting & Strategy Credit Portfolio & Portfolio Concentration Risk Operational Risk 2

Risk/Reward - The Process
Therefore There Is a Simple Process: Establish the Strategic Aims of the Institution Risk Identification - Via Risk Profiling Exercises Segment Market, Operational & Business Risk Groups - Via Transfer Pricing and Re-engineering/re-organisation of the Institution Measure - Using Traditional and More Modern ALM Techniques Monitor - a General Technique of Traditional and Modern Management Methods Calculate Capital at Risk - Via Risk Adjusted Performance Measures (RAPM’s) Measure Risk/reward Performance - Return on Equity, Risk Adjusted Return on Capital Etc. Operationally, Do the Business/provide the Institution’s Services Provide Benefits to Shareholders, Clients & Employees - Via Incentive Schemes

Information Management & Processing
Balance Steering Oversight Brakes Reverse Positions Within the Cone? Management Board Decision Concurrence Compliance Cashflow Support Substance Size Being Information Management & Processing Diagram designs unfortunately show emphasis when not intended Business Unit Business Unit Business Unit Business Unit Business Unit Business Unit Business Unit Business Unit

The ALM Solution Advanced Risk Management and Analytics
ALCO Management, Regulatory Reporting, Cost Allocation and Pro-forma FTP Advanced Risk Management and Analytics Asset/Liability Management Financial Planning and Forecasting What do we sell - think of house analogy bottom - subsystems - may consist of mainframe/PC/Oracle - be in different formats, data missing - need to create correct current position Insight foundations to ALM 3 functions: taking flat file from subsystems: provide feed to CVG, provide engine for transfer pricing, populated recreational database (FDBR) move on with our clean & trusted set of data CVG - bricks & mortar of ALM budgeting & planning - with windows into system being User friendly spreadsheet interface ViewPoint - roof - next generation of ALM technology - advanced analytics With our suite you can have all of this - 1 vendor for comprehensive solution Data Transformation and Management Existing Internal Source Systems

Where Are You on the Risk Reporting Continuum?
OAV (Total Return Analysis) Complex RAROC Historical/Future FTP Regulatory Minimum? Monte Carlo Simulation VaR Multiple Income Simulation Medium Balance Sheet & Derivatives Support Multiple Simulation Dotted line? The benefit between Var & is only vertical due the constraints of power point! Budget & Forecasting Basic Income Simulation - Single/Multi Currency Duration Gap Reporting Regulatory Returns Benefit Minimal

ALM Techniques & Methods
GAP Analysis Maturity Structure, Repricing & Fx Positions Duration Analysis Price Sensitivity, Immunisation Scenario Analysis / Simulation Net Margin, Effect of New Business Market Valuation & Trade Analytics - Economic Value of Equity Embedded Options, US Market, Mainly MBS’s Option Adjusted Value at Risk Integrated All Above, Including Behaviour Optionality Total Return Analysis - Institution Wide

Interest Rate Risk Sources of Risk Risk Measurement Standard
Direct: Reprice Term Mismatch Indirect: Optionality Prepayments Deposits Risk Measurement Standard Net Interest Income Market Value  Capital Interest Rate Sensitivity Potential and Sustainable Losses With respect to interest rate risk, there are two types of risk: direct interest rate risk which arises from mismatched asset and liability interest repricing dates, and correlated interest rate risk, which arises from changes which are derived from interest rate changes and exhibit option-likecharacteristics of some financial instruments, such as prepayments and deposit withdrawals. Correlated interest rate risks are not symmetric and failure to consider the asymmetry ignores important aspects of interest rate risk. In measuring interest rate risk, it is necessary first to agree upon the standard by which the economic health of an insitution will be measured. Among the target accounts that changes in interest rates affect are: Market Value of Equity, Net Interest Income. Management must determine which of these measures is its goal to protect so as to establish tolerance levels or interest rate risk limits. There are at least three hypothetical components to the market value of an institutions equity: 1. Market value of portfolio equity, the market value of currently booked assets less the market value of currently booked liabilities; 2. Operation equity, the present value of net future operating and fee income; and 3. Franchise equity, the present value of businesswhich is not booked yet. Partly because market value depends upon the present worth of the cash flows which assets and liabilities are expected to generate over time, and partly because secondary market makers seem to favor a single index to measure interest rate sensitivity, duration analysis appears to have gained widespread acceptance as the favored means to measure interest rate risk at financial institutions.

Interest Rate Risk: Measurement
Measurement Methods Static Analysis Gap Duration Dynamic Analysis Simulation There are several approaches to measuring and controlling interest rate risk at financial institutions which fall into two categories: static and dynamic. A static interest rate risk measurement system is one that measures the risk in a current balance sheet. It does so by comparing the cash-flow characteristics of financial instruments on the balance sheet at a point in time. This analysesgives little information as to future interest rate risk position and as such is not conducive to proactive asset / liability management. Among static measurement methodologies are: Gap analisis which focuses on the reprice timing of all the instruments of the balance sheet; and Duration analysis which generates an index per instrument indicating the price sensitivity. Dynamic systems measure the interest rate risk in future balance sheets. They focus on where the financial institution is headed, not where it has been. Such measurement systems capture the effect of both the roll-off and the reinvestmentof both funding and earning assets during the planning period. Dynamic measurement systems integrate simulation analysis to gap analysis. This is a sophisticated planning tool which enables an institution to perform interest risk analysis incorporating a budget or strategic plan. Thus future repricing positions will include run-offs as well as prepayments and future volumes. In addition, this analysis enables the user to simulate the balance sheets market value and income and expense under different interest rate scenarios. Thus this is a tool whereby an institution can test its balance sheet under different stress conditions.

Gap Analysis: Maturity Structure, Repricing Gap, Liquidity Gap
Starting Point Based on the first reprice moment Time Bands Gap(t) = Asset(t) - Liability(t) NII analysis tool Gap analysis is considered a static interest risk tool because it measures the level of interest rate risk in an existing balance sheet. Financial instrument data is gathered and entered into the report using monthly or quarter end information from the institutions data processing systems. The completed gap report compares how quickly a financial institution’s assets respond to market rate changes as compared to its liabilities. If one side of the financial institutions balance sheet responds more quickly to rate changes than the other, interest income will change faster (or slower) than interest expense. The gap is the mismatch between the quantity of assets and liabilities that are repricing in a given time period. Financial institutions using gap analysis focus on ratios such as gap/assets that measure the relative level of interest rate risk. The larger the gap/asset ratio, the greater the amount of interest rate risk. The sign in front of the ratio indicates the direction of the risk. With a positive gap the financial institution is considered to be positive rate sensitive so profits would be expected to move in the same direction as rates. With a negative gap, the financial institution would be considered to be negatively rate sensitive so profits would move in the opposite direction as rates.

Gap The Simplest But Least Accurate Tool Short Term, One Point in Time, Static, No Reflection of Future Changes Records Balances (Par Values) Not Cashflows Principle Balances Unaffected by Interest Rate Changes Arbitrary Repricing Buckets/intervals Indicates a Nominal Risk Amount Rather Than Income or Capital at Risk Misleading Results With Amortising & Leases Rate Shock Calculations Are Parallel & Totally Misleading Totally Ignores Basis Risk & Optionality of A/l’s

Duration Analysis to DVBP/PVBP Price Sensitivity, Immunisation
Ideal for Bond Type Instruments With Fixed Cashflows The Majority of a Financial Institution's A/L’s Are Not Bond Type in Nature Difficulties Coping With Embedded Optionality Rate Shocks Suffer From Convexity Errors An Important Calculation But Not The End Measurement Method

Simulation/Scenario Analysis to MVPE/EVE Net Margin, Run-off & Effect of New Business
Dynamic Models Future Balance Sheet Models Optionality Characteristics Prepayments Deposits Term Structure of Interest Rates Asset/liability Mix Hedge Strategies Simulates Gaps and Durations Under Different Scenarios Gap and duration analysis, the most commonly used tools for small to medium sized financial institutions in measuring and monitoring interest rate risk over the last decade, are near the end of its life cycle. Given the regulatory push toward market value analysis and the pressure on management to optimize performance relative to goals while managing interest rate risk, most financial institutions are moving toward computer simulation as their primary interest rate risk management tool. Simulation is fundamentally different from gap and duration models in that it is dynamic or forward looking rather than static. It anticipates future events and lessens the role of crisis management. In this manner, mortgage loan prepayments as well as deposit behavior is modeled and incorporated into the dynamic balance sheet. Thus interest rate risk measurement incorporates future balance sheet projections. In addition, through simulation and the use of tools such as term structure modeling, future interest rate paths can be effectively captured.

Monte Carlo Simulation
A Statistical Technique to Generate a Large Number of Random Variables Such As Interest Rate Paths Eliminates Single Point Estimates and Allows Real “What-if?” Capabilities Define a Stochastic Process for Any Assumption Be It an Interest Rate Scenario, Prepayment, or Future Business Assumptions User-defined Number Of Trials. User-defined Volatility Correlation Of Assumptions Sensitivity Analysis Ranks Assumptions According To Importance Real Time Graphics Full Range Of Graphics And Statistics Explanation on slide

Risk Management Profile
Market Interest Rate Liquidity Income Retail Banking Fund Management Credit Behavior Corporate Banking Wholesale Bank Operational Banking Book Trading Book

Market Interest Rate Liquidity Income Retail Banking Fund Management Credit Behavior Corporate Banking Wealth Management Operational

Cashflow Catalysts Cash Attrition FX deals Credit Cards/cheques Funds
Drawdowns/ Rollovers New business Settlements

Report Report Report Report Market Market Market Market Market Report Interest Rate Interest Rate Liquidity Liquidity Liquidity Liquidity Report Interest Rate Liquidity Income Income Income Report Report Report Private Banking Private Banking Income Fund Management Credit Credit Credit Credit Report Report Behavior Report Corporate Banking Behavior Asset Management Wealth Management Wealth Management Operational Operational Operational Report Report Operational Report Report Report

What’s driving the Banking Book/Trading Book?
Large/Small Transaction Volumes Simple/Complex Instruments Any Bank Small/Large Cashflow Implications Long/Short Term Re-Pricing

Consider Is Integrated Risk Management
a technology issue a software issue a risk management methodology issue a strategic Board level issue or a combination of the above?? Integrated Risk Management should not be a “source system” issue but a unification process which recognises that source systems and their environments can, and will, change over time

Consider Risk Management procedures vary vastly from institution to institution as well as the available data and environments This implies Integrated Risk Management will be both expensive and time consuming Therefore, Integrated Risk Management MUST be custom made according to the institution’s requirements

GAPP/Regulatory Reporting
Institution Wide STP HTM Banking Book Risk Management Trade Entry Call Centre Warehouse Trading Analytics ATM Output Market Statements Internet Bank Interest Rate Liquidity ATM S/System Income Retail Banking Fund Management Call Centre General Ledger Credit Other EIS Reporting GAPP/Regulatory Reporting Investment Banking & Broking Loan & Dep System Assurance Branch Entries Behavior CRM Operational GAP & IAS Adjustments Trade Data Corporate Banking Wealth Management ATM’s Position Valuation & Management Cash Management FV Trading Book

Where does ERM fit it? Enterprise Risk Management Interest Rate Credit
1 Long/Short Term Re-Pricing Market Operational Enterprise Risk Management

ABC Bank Finance Environment: Before ERM
Online Applications Financial Analysis & Reporting Before ERM Liquidity DDA’S CDs M.I.S. & E.I.S. IRAs Planning & Forecasting C/L Transactions Interest Rate Risk Analysis All Loans Client site prior to implementation left side are subsystems - right are reporting requirements IT has developed custom extracts for existing products. Insight serves as conduit to collect & validate info We have a lot of useful information which is not always accessible Corporate Profitability Measurement Bank Card Trades Bonds/ Equities

ERM ABC Bank Finance Environment: After ERM
Online Applications Financial Analysis & Reporting After ERM Liquidity DDA’S ERM Common Rate Assumptions/Yield Curves Shared Current Position PLUS F.T.P. Datawarehouse CDs M.I.S. & E.I.S. IRAs E-W Market Risk Measurement C/L Transactions Credit Limit Measurement All Loans Client site prior to implementation left side are subsystems - right are reporting requirements IT has developed custom extracts for existing products. Insight serves as conduit to collect & validate info We have a lot of useful information which is not always accessible Corporate Profitability Planning Bank Card Trades Enterprise-wide Bonds/ Equities

Off and On Balance Sheet
Techniques Applied TRADING BOOK Instruments Bonds & Equities Equity Derivatives Forwards Futures Options IR Derivatives (FRA, swaps, futures, swaptions) Currency Derivatives (FRA, futures, swaps, options) Precious Metals derivatives (forward, future, options) Guarantees BANKING BOOK : Instruments Loans Mortgages Checking Accounts Savings Off and On Balance Sheet BEHAVIOR : Data Coupon Spread Seasoning Seasonality Burnout Complex mathematical equations and algorithms

Problems BANKING BOOK Long term Simple instruments Higher volume
Smaller cash flows Rate Assumption “B” Risk Methodology “2” No Common Business Volume Plan TRADING BOOK Short term Complex instruments Smaller volume Large cash flows Rate Assumption “A” Risk Methodology “1”

Solution Overview Cash Flows for EW V@R, HS V@R Analysis Balance Sheet
Market Data Trading Portfolio Data Repository Shared Current Position Common Rate Assumptions A/LM Market Risk Cash Flows for EW HS Analysis

Strategy The global financial institution needs to achieve the same process that has evolved in the trading arena - e.g. STP combination of front, middle and back offices Equalise the Micro risk management of the trading book with the Macro risk management of the retail banking book Equalise the use of financial engineering and behaviour analysis across the trading and banking books

Strategy REPORTING Enterprise-Wide V@R HS V@R Liquidity Regulatory
Market Value of Equity Effective Duration/Delta Income Simulation Option Adjust Spread Analysis

SunGard SunGard Trading and Risk Systems
Listed on the New York Stock Exchange (symbol:SDS) 16th Largest Information Services Firm Market Cap US $ 4,8B and 1999 Revenues US $ 1.3B Portfolio of focused products for financial institutions including the Over 7000 employees Handles 70% of Nasdaq trades - Mangage over $7trillion in investment funds SunGard Trading and Risk Systems Product Group for Risk Management BancWare: Asset and Liability Management, Financial Forecasting & Planning, and Funds Transfer Pricing Infinity & Panorama: Real Time Portfolio Management, Market, Credit Risk, Straight Through Processing & BackOffice Collateral: Credit Risk Mitigation Credient: Credit Limit Monitoring

1 2 3 4 5 6 Agenda Enterprise Risk Management
Which Risks? Enterprise Risk Management Integrating the Trading and Banking Books - Yes or No? 2 3 Asset Liability Management What capabilities should be provided? 4 Trading and Risk Management What capabilities should be provided? 5 Integration of Risk Achieving Enterprise Risk - Sample Integration 6 Discussion Questions and comments

Enterprise Risk Management
Analysis Risk Dimension Currency Risk Interest Rate Risk Product Coverage Market Risk Counterparty Risk Credit Operational Risk Product Dimension Trading Balance Sheet Bonds, Equities, Swaps, Options, FRA’s Mortgages, Demand Deposits, CD’s, Loans etc.

Integrated Risk Management
Financial Balance Sheet Trading Book Liability IR-, Position-, FX-Risk Investment Book Capital Currency Risk Interest Rate Risk Both the Trading Books and Banking Book have Interest Rate and FX Risk The trading book and the banking book need a different approach and different systems

Why have ALM and Trading Risk Systems?
The trading book and the banking book need a different approach and different systems BANKING BOOK Frequency: weeks or months Instruments:deposits, loans, ... Goal: long term stability Strategic Management Buy and Hold Portfolio Earnings at Risk Profitability Analysis TRADING BOOK Frequency: hours or days Instruments: equities, bonds, … Goal: short term gains P&L focused Trading Strategies and Desk level Risk Limits on Trading and Exposures Accurate methodology & systems Accurate methodology & systems …so we need to put two different systems together for an overall overview

Interest Rates, FX Rates
Techniques Applied Convergence of both risk systems for an overall risk view BANKING BOOK : ALM & FTP Repricing Balance Sheet Market Values Sensitivities, EaR, VaR Modelling of non maturing accounts Funds Transfer Pricing Budgeting & Forecasting GAP Analysis Behavior Modeling ... TRADING BOOK Market & Credit Risk Market Valuation Trading, STP Sensitivities, Hedging Market and Credit VaR Exposure & Limits Management P & L Analysis Return on Capital Stress Testing …. Interest Rates, FX Rates Managing Risk

Solution Overview Cash Flows for VAR Analysis Balance Sheet
Market Data Trading Portfolio Current Position Data Long Holding Period Impact of New Business Income Simulation Transfer Pricing Balance Sheet Valuation Total Return Analysis ALM Market Shared Current Position Common Rate Assumptions Short Holding Period Valuation and VAR Exposure Benchmarking Cash Flows for VAR Analysis Essential Outputs Asset Liability Management Comprehensive Planning Profitability Measurement Essential Outputs Enterprise Wide Market Risk Management Credit Limit Management

ALM Analysis Overview Focus on Risk In Banking Business
Mark to Market Less Relevant Net Interest Income Exposure Repricing Customer Options Market Value Sensitivity - Used as Indicator of Earnings Exposure

ALM - Gap Analysis Interpretation

ALM - Funds Transfer Pricing
Loan Credit Spread LIBOR Curve Maturity Mismatch Rate Funding Margin Deposit Maturity

ALM - Balance Sheet Modeling
Future Business / Origination Behavior - Prepayment / Optionality / Non Maturity Contractual Runoff Re-Pricing

ALM- Regulatory Reports & Analysis
Many different layers: Mark to Market, Income Liquidity, IAS 39

ALM - Fully Funded FTP Analysis
Margin or currency basis, rolloff vs origination, trends w history, projections & variances

ALM - What If… Simulation
Variables - Rates, Spreads, Volumes, Characteristics, Funding Results - Income, Market Value, Funding, Hedging

ALM - Retail Product Pricing
Identify Embedded Option Costs Provide Underwriters with Tools to Properly Price Retail / Commercial Products

Market Risk A real-time trading & enterprise wide risk management system and framework with: - Trade Capture, Trade Repository - Cross Asset product coverage (FX, Interest Rates, Equities) - Market data repository, terms and conditions - Flexible position management - VaR Analytics , Market and Credit - Limits on VaR, stop loss, credit exposures - Sensitivity measures, hedging analytics

Asset Coverage - Typical Instruments
Equities Cash Equities ( Ordinary and Preferred ) ADRs/ GDRs Stock Loans ( Repos) Index Futures Equity & Index Forwards Equity & Index Swaps Vanilla Listed Equity & Index Options Vanilla OTC Equity & Index Options Warrants ( Covered and Generic ) Exotic Equity & Index Options Convertible Bonds Basket Options & Swaps Money Markets Payments Cash FRA Futures Option on deposit futures CDs Swaps Interest rate swaps Swaptions Caps Floors FX FX futures FX options Currency Swaps Securities Treasury Bills Government, corporates Index linked bonds Annuities Bond repos Discount bills Buy/sell back Bond futures Bond options Options on bond futures Mortgage back securities Commodities Metals

Portfolio Management Import trades/positions from a myriad of front office systems Trade Capture Partition results in Spread-sheet style pivot tables with ability to drill down to trade level detail Sensitivity measures, P&L by trade, avg cost, real time pricing Graphics, Tables & Excel interfaces Slice and dice by instrument type, issuer, broker, biggest losing trades

Hedge and Sensitivity Analysis
Sensitivity analysis for interest rates, currency, equity derivatives, Portfolio sensitivity of 1 basis point shift for each risk factor What if analysis determines best hedging for desired risk levels. Optimize trades from user allowed hedge instruments to minimize risk

Market Data Acts as Repository for consistent market data to all applications Repository of Rates History Seamless connections to main market rates providers, e.g., Reuters, Dow Jones, Bloomberg

Historical Data and Portfolio Results
All historical and statistical data for VaR Archived market data & risk factors selected to make ‘statistics set’ Backtesting - Result data archival Historical and monte carlo simulation sets Auditing and disclosure

Parametric VaR Multiple holding periods User defined historical period
Multiple confidence intervals Calculations may include a gamma effect to track non-linear risk Diversification within markets such as interest rates, FX and equities or across all markets Riskmetrics VaR support Undiversified VaR - worst case risk when correlations break down between asset classes

Stress Testing Analyze potential changes in market conditions that can impact your market risk Shifts in interest rate curves, equity prices, changes in volatilities, changes in currency. One scenario can combine shifts across equities, FX, and interest rates Scenario results can be saved daily with other portfolio results

Credit Risk Counterparty (pre-settlement) risk; Replacement Cost, Potential Future Exposure, C’party Risk, Net Replacement Cost, Net C’party Risk, Gross Notional & Net Notional. Exposure to ratings calculated for any deal for both c’party & issue Exposure Analysis based on potential forward evolutions of a portfolio taking into account the variance of pricing factors Ability to recognize the timing of forward exposures, as well as netting agreements, results in a more effective usage of credit allocations Credit VaR both macro (Credit Metrics) and micro - support of credit migration and default

Cashflow Analysis View all cashflows (future or projected) broken down by source in user-defined buckets Settlement Risk based on user-specified function of incoming and out-going cashflows Maximum Exposure Profile can be selected to show evolution of settlement risk through time. Largest future value identified; limits can be set on number Comprehensive netting agreements taken into account for settlement risk

Limits Flexible limit structure enables limits to be set across wide range of analytic variables Set and viewed at any or all levels of aggregation or organization Allow for sets of complex, operational limits Graphical, Table and Excel visualizations of limits / tolerances

Trade Capture & What if Trade entry for all instrument types. View trade to its details. Calculate price and sensitivities before activating trade. Used to enter “what if” positions Supports security master of terms and conditions for Bonds, and Equities and their derivatives

Integration of Risk Solutions
Banking ALM Aggregated by credit rating, currency, branch embedded derivatives separated out cashflows by buckets non maturturing assets Data Solution Trades/ Positions Reference Data Risk results market & historical data Mkt Cr Limit Executive Market Data Analyses Trading 3.Send aggregation of banking book bucketing cashflows by credit rating, currency, branch, etc. Handle non maturing assets 2.Send trade valuations for trade types not supported by BancWare (e.g., exotic options) 1. Market data for consistency in valuation

Risk Solution Integration
Trades Real Time Feed Bloomberg via Excel Reports Fund Transfer Pricing (daily) (no implementation plans yet) Trading, Financial Assets, Derivatives Balance Sheet Reporting DB Transform Mapping FTP Interest Rates Executive daily daily Interest Rates FX Trading Financial Assets Derivatives Risk DB Static DB ALM Reports monthly monthly ALM Engine Risk DB Gaps as Zero Bonds for VaR Limit System (+ Call Option on Benchmarking) Market Risk monthly Web Reports

Integrated ERM Clients
Hanvit Bank Soeul Bank Development Bank of Singapore Aargauische Kantonalbank Basellandschaftliche Kantonalbank Migrosbank Verwaltungs und PrivatBank AG

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Banking and Trading Book Integrated Risk Management

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