Banks Chained to Legacy Systems as CVAs Suffer

Ninety-two percent of investment banks are still without sufficiently advanced IT infrastructures to perform effective credit valuation adjustments (CVAs), according to a research report from analytics firm SAS.

The report, which contains feedback from 39 institutions, claims that only eight percent of investment banks are fully satisfied with their infrastructure, while 42 percent think them incapable of fulfilling requirements.

The problem, according to James Babicz, head of risk at SAS UK & Ireland, revolves around legacy systems that cannot handle the large tranches of data thrust upon them─nor can they provide the on-demand picture of complete risk exposure that investment banks require.

"What was surprising for me was the fact that I had assumed that at least intraday or end of day CVA calculations─and fairly robust, bilateral ones─were being done, but at the end of the day there's still quite a gap between where the investment banking businesses want to be and the infrastructure, the IT and the capabilities, that they actually have," he says.

After shocks
Just five percent of respondents said they were able to calculate CVA in near-real-time, while those managing risk on an intraday basis amounted to only 24 percent, suggesting that the majority are lagging well behind even the most basic risk requirements.

When you're looking at funneling $300-400 trillion worth of derivative instruments─and this is the OTC market alone on an annual basis─technology now needs to move to something that flows in real time and can handle massive amounts of data and massively complex computations.

Another reason for this, Babicz suggests, is that banks have struggled to come to terms with changes to the banking model worldwide since the financial crisis of 2008, while legacy systems have taken longer to shift than first thought.

"I think the 2008 event was a wake-up call for not just changes within individual business lines or even within regions or countries, but more of a fundamental change in terms of what is a bank's purpose and how should banking be done in the future," he says.

"And if we focus in on the trading operations, they're really very complex things, very challenging in terms of just getting all the data in a reasonable state and doing those calculations on a day-to-day basis. So when you're looking at massive change and not really knowing what the answer is, and you've still got huge pressures to get the job done today, things take a little bit longer to get in place. Even today, pretty much five years on from the event, we're still seeing some of the banks struggling to get a handle on that massive, complex IT structure."

Real-Time Analysis
The solution, he says, is for investment banks to remove themselves from old-world technology and batch systems, which are limited to analyzing data after the event has happened, and to invest in the complex event processing (CEP) tools that can analyze the data, in a more proactive fashion.

Banks must move away from a tendency to relegate risk to the back-office, he explains further, and take a proactive approach that covers all asset classes, rather than relying on an outdated and siloed approach that worries solely about counterparty risk and gives no thought to internal risk within the bank itself.

Growth within the derivatives market, especially over-the-counter (OTC), as well as more complex structured products and credit derivatives, means banks can no longer get away with end-of-day or end-of-week processes, says Babicz.

"If you're dealing with a handful of transactions a day, say, 10 to 15 years ago, that's okay," he says. "But when you're looking at funneling $300 to 400 trillion worth of derivative instruments─and this is the OTC market alone on an annual basis─that massive amount of data, massive amount of exposures, almost demands real-time. Technology, very bespoke in the old days, now needs to move to something that flows in real-time and can handle massive amounts of data and massively complex computations."

The Bottom Line
• Investment banks are still struggling to replace legacy systems with the advanced IT infrastructure necessary to perform effective credit valuation adjustments.

• Massive growth within the derivatives space means banks can no longer get away with end-of-day or end-of-week processes.

• Banks must leave batch behind and install CEP tools that can analyze the data in real-time.