A large global bank with $2.5 trillion in total assets and a leader in derivatives trading was having difficulty with its market risk management process. Their portfolios consisted of a diverse set of asset classes, and thus a broad range of exposures. The bank’s market risk processes were fragmented across portfolios, resulting in VaR and stress test production taking until late morning of the next business day to complete. In addition, VaR on MBS products was not being calculated accurately, which was identified as a major gap. The team was struggling to find a solution that will enable them to deliver the information requested by the risk managers in a timely manner, largely due to the poor communication and collaboration between the market risk management and market risk technology teams. The client’s mandate was to transform its existing processes to reduce processing time to complete VaR calculations by end-of-day, and enhance the calculations to include MBS products.
- Reviewed entire market risk technology architecture, data flow, risk systems used and hardware resources.
- Reviewed the scenario generation process for complex credit derivatives and developed revised methodology in collaboration with the market risk management team.
- Researched and made recommendations on the use of approximation techniques for calculating VaR on complex mortgage-backed and asset-backed derivatives and structured products (MBS/ABS).
- Proposed a data warehouse solution for collaboration between global centers to ensure consistency in scenarios used for VaR production.
- Managed an effort between the business, programming team and IT staff to optimize the platform, including optimizing the VaR calculations and re-engineer hardware infrastructure.
- Worked with the IT staff to successfully implement proposed solutions.
- Stabilized scenario generation process resulting in accurate and reliable VaR calculations.
- Market risk VaR measures now included entire portfolio including complex MBS/ABS derivatives and structured products.
- Produced VaR for credit derivatives in a timely manner, reducing calculation time by over 40% as a result of implementing the recommended approximations and optimization.