A Large Global Bank Implements an Integrated Risk Management Solution

THE CLIENT:

A large global bank

USERS:

Head of risk, derivatives trader, market risk manager, credit risk manager, xVA trader

Derivatives trading has changed dramatically over the last decade, with new compliance costs narrowing margins. Capital and valuation adjustments (xVA) capacity must now be treated as scarce balance sheet resources. Getting ahead of the competition requires a complete and accurate picture of the true P&L associated with any potential deal. The information must be delivered fast enough to drive traders' decisions and cover a bank's entire derivatives portfolio. Knowing how the costs change under market moves is also crucial, so that adverse moves can be hedged.

The upcoming Fundamental Review of the Trading Book (FRTB) also requires banks to make a more rigorous assessment of their market risk exposure. This includes new eligibility tests for risk factors used to derive capital requirements under a revised Internal Model Approach (IMA). With changing deadlines for compliance and varying local interpretations, firms continue to struggle with the complexity of the guidelines under fluctuating budgets.

A number of groups at this large bank needed a technology platform to support their systems for market risk, counterparty credit risk and xVA. They wanted a system that could deliver a complete view of the xVAs arising from counterparty credit risk, funding, collateral and regulatory capital.

Pain Points:

Under the Basel III framework, there have been revisions to the standardized approaches for calculating credit risk, market risk and credit xVAs. Firms require timely risk measures to manage risk exposure and create trading reports. The bank's previous third-party risk management software took over eight hours to calculate credit risk, impacting its ability to generate timely risk metrics. This hindered the bank's ability to achieve Internal Model Method (IMM) approval for a wider range of trading and business activities. The bank wanted a solution that could:

• Offer the necessary transparency to support its IMM approval process.
• Achieve the target requirement of supporting in excess of 400,000 trades across multiple factors (e.g., interest rate, foreign exchange, credit, equity and inflation) for over 29,000 counterparties over several regions, all within the required calculation window.
• Scale as the business grew.
• Support pre-deal and what-if analysis to enable traders to accurately price trades and explore the impact on price of changing deal terms or selecting different dealers/Central Counterparty Clearinghouses (CCPs) to place hedge trades.

The bank was already using S&P Global Market Intelligence ("Market Intelligence") technology for counterparty credit risk and managing exposure through Potential Future Exposure (PFE). They reached out to learn more about the offering, and to run scalability tests.

The Solution

Market Intelligence discussed a unified platform for managing market risk, counterparty credit risk and derivative xVAs. The solution provides support for regulatory capital calculations and an extensive range of pricing valuation adjustments on a single, modular platform and would provide the bank with:

• Risk analysis for investment management: Leverage powerful analytics to calculate market risk using Value-at-Risk (VaR) based on Monte Carlo or historical simulations, as well as position and portfolio sensitivities, scenarios and stress tests.
• Data for insights: Gain unique insights by using extensive curated market and reference data. Combine this data with your own internal or third-party data to enhance risk capabilities.
• Decision support tools: Decision support tools like scenario stress testing and 'what-if' scenarios give you an edge in portfolio construction. Run stresses based on historical data and predictive models, as well as user-defined scenarios to enhance your risk management infrastructure.
• Consistent risk control and regulatory capital: Get a consistent view of PFE and counterparty credit risk capital under different frameworks, including SA-CCR, SA-CVA, FRTB-SA and FRTB-IMA.
• Reduced total cost of ownership: Pay only for what you use with our cloud-enabled technology. Lower the administrative burden of deploying and maintaining a risk solution without sacrificing flexibility.

Key Benefits

The bank decided to work with Market Intelligence due to the firm's financial engineering expertise, existing customer base and leading-edge technology. Subject matter experts collaborated with bank professionals for a detailed business analysis to align the bank's requirements with technical specifications before rolling out the extended solution. This was followed by additional phases of implementation, integrating highly complex trades into a very large portfolio and generating the relevant risk measures. This enabled the bank to upgrade/migrate scenario generation to Monte Carlo simulation of foreign exchange, interest rates, equity prices, inflation and par credit spreads, plus extend Market Intelligence's pricing models to exotic instruments and firm-specific requirements. The solution:

• Meets the need for timely data.
• Calculates a broad range of risk measures, including regulatory capital, PFE and credit valuation adjustments (CVA).
• Performs risk factor and portfolio backtesting.
• Also performs exposure stress testing required for the IMM approval process.

Click here to here to learn more about our XVA Solutions.

S&P Global provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.