enterprise wide risk management

8/2/2019 Enterprise Wide Risk Management

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Enterprise Wide Risk

Management


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Topic:

Enterprise wide risk management

ERM is the process of identifying,measuring and controlling the effect of

internal and external factors that (can)negatively affect the value of a company.


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Goal:Managing the ERM Process

riskfactors

riskobjects

riskmea-sures

riskappe-tite

loss profit

uncertainty

beha-vior

s

R

L


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Goal:Managing the ERM Process

models

riskfactors

riskobjects

riskmea-sures

riskappe-tite

loss profit

uncertaint

y

beha-vior

s

R

L


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Challenges:The 6 biggest issues

Combining different risk types

Timeliness of figures

Guaranteeing accuracy of figures Interpreting the analytical results

Running out of (computer) steam

Qualified personnel


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Combining different risk types

Different risk types:credit risk

market riskFX riskIR risk

legal riskoperational risk

etc.

Different risk factors:counter party defaultmarket risk

FX ratesInterest rates

legal structurefraud, human errors

?Different risk measures:Credit VaRMarket VaR

Total risk < sum of all risk types


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Guaranteeing accuracy of figures

VaR = 150 Mln with 95% confidence

VaR = 400 Mln with 98% confidence


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Guaranteeing accuracy of figures

400,000500,000600,000700,000800,000900,000

1,000,000

Confidence level

VaR

95,0% 99,9%


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Interpreting the analytical results

Dear CEO:

Our Value at Risk is USD 5,000,000!

Dear Auditor:

What the !@&*# does that mean for my company?


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Running out of (computer) steam

5,000 trades per day100 positions

100 risk factorsSuppose you want to do a Monte Carlosimulation with 100,000 replications100 * 100 * 100,000 = 1,000,000,000

calculations


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Challenges:the 6 biggest issues

Combining different risk typesTimeliness of figuresGuaranteeing accuracy of figures Interpreting the analytical results

Running out of (computer) steamQualified personnel


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How can technology help?:Success criteria

All major analytical techniques, within a singleenvironment

Full parametrisation of analysis attributes Portfolio-driven data model Full Repricing Incorporate new instruments and pricing models Create and adapt instrument and model attributes Analyses integrate different risk types Traceable calculation processes with user intervention Market modeling

Clear and concise drill-down reporting Web reports Data Management


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Design specifications

All major analytical techniques, within a

single environment No need to jump between specialist packages..

Any number of different analyses can be

performed in a single run.


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Full parametrisation of analysis attributes Users must be able to customize the

specifications of the various parts of the riskanalysis process.

Users must be able to mix and match different

specifications as needed for different analysis

projects.


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Portfolio-driven data model No fixed data model.

Ability to configure data model from an existing

database schema.

Ability to process data as is.

Ability to pull data together from numerous

heterogeneous data stores.


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Incorporate new instruments and pricingmodels

New instrument types configured easily.

User selects and installs pricing models.

No restrictions on pricing models.

Any number of vendor supplied or user written

pricing libraries can be installed.


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Analyses integrate different risktypes

Market risk and credit exposure handledwithin the same framework.

A unified and logical architecture:

Consistent use of data definitions,

calculation methods, representation offigures,

(Un)conditional risk measures


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Trackable calculation processes with user

intervention

Not a black box.

User can define and control key calculations.

Intermediate calculations can be stored and

examined for additional processing or

validation checks.


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Market Modeling

Powerful nonlinear statistical modeling features

can be used to specify and fit models of market

dynamics.


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Clear and concise drill-down reporting All analytical results can be broken down oraggregated.

You can slice and dice the risk measures for aportfolio across any set of dimensions that you

choose to define (by region, counter-party,

instrument type, ).

Marginal and Conditional risk measures.


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Web reports

Web ServerJava-enabledweb browser

Risk Server

HTTP

HTTP


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Data Management

A true risk management solution has extensive

possibilities for data access and data processing.

Must include extensive back-end data warehousing

software.


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True differentiators...

Openness, extensibility, flexibility

Data management

Clear and concise reportsState of the art risk engine

Market modeling

leading to true business advantages


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To manage a business well is to manage its future; andto manage its future is to manage information.

Marion Harper

Managing risk is managing the future.Rik van de Weerthof

+

=

Managing risk = Managing information.

Some quotes...


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time-oriented data

coming from multiple applications

according to subjects meaningful to the business

driven by the need to inform decision makers

Technology helps organising


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Operational Systems

Get data IN

Large volume ofSimpletransactions

Staticapplications

Automates Routine Tasks

Business Intelligence Systems

Get information OUT

Smallnumber ofComplexqueries

Dynamicapplications

Enables Creativity

Technology can fulfill anoperational or a business

intelligence role


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Product

Distribution

Credit rating

Geographical

Time (to maturity)

Counter party Type

Loans portfolio

Option book

Equity book

Ctpty

Ctpty Type

All Ctpty

>A

B-A

C-B

Junk

10 yr

Technology organises theinformation dimensions


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Drill down

Technology gives insight in

multidimensionality


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Technology gives insight in

multidimensionality


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The Power to Know RISK

R I S KD I M E N S I O N STM

enterprise wide risk management

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