When it comes to market risk, the challenges—and solutions—facing all at present center on transparency. From closing loopholes that in the past allowed regulatory arbitrage, through to more accurately analyzing the market impact of a portfolio’s holdings, these aren’t easy problems to solve, more often than not requiring fiendishly complex calculations, simulations and constant assessments.
Being a vendor in this space, too, is particularly challenging—while a bank simply has to worry about its regulatory obligations and internal risk metrics, a vendor must produce a platform that can not only perform difficult and laborious work, but do so in a manner that allows it to take the idiosyncrasies of risk management practices across various institutions into account, and the platform must work in all of these scenarios to a high degree of accuracy.
Few have managed that better than RiskVal Financial Solutions, which becomes the only company in the history of the Sell-Side Technology Awards to win the market risk category twice, for its RVPortfolio product. Fittingly, says Jordan Hu, CEO at RiskVal, the key to success has been transparency. “Our RVPortfolio solution is flexible, customizable, and has a unique approach to calculating value-at-risk (VaR) and profit-and-loss (P&L), which makes it easier for our clients to meet the challenges of complying with new regulations,” he says. “RVPortfolio, unlike many competitors, is not a black-box solution, and it calculates an auditable P&L explained at every level of the portfolio hierarchy, allowing users to track the source of portfolio P&L based on each contributing risk factor.”
The historical VaR functionality looks back over 15 years of historical data, with factor-based VaR being a capability developed by RiskVal over the past few years. Under this approach, each instrument-type P&L is deconstructed into a set of market factors, and then actual P&L is calibrated against that. This approach allows daily P&L to be replicated as historical VaR, and can also provide P&L that is comprehensively explained for a range of trade types and strategies.
Further, the platform includes sophisticated techniques for market-risk modeling, including “what-if” scenarios that are user-defined. Looking ahead, Hu says, this will be expanded further.
“Our R&D team is currently working on several initiatives, including, but not limited to, expanding our coverage of credit, credit derivatives, options and municipal bonds, as well as expanding the selection of available ‘what-if’ scenarios, including the credit crunch and the Lehman Brothers crash, as an example,” he says.
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