Peter Sofarelli, Director of Financial Services Sales at SAS discussed advancements in analyzing portfolio risks and how banks are employing new technologies to keep up.
Katie Sillo: What are the challenges in aggregating market risk given the complex and siloed risk applications that exist in investment banking?
Peter Sofarelli: The challenge remains creating a consistent, single version of the truth across an enterprise to dissect and get an aggregated view of firm-wide portfolio risk. Loans, bonds and OTC positions within must be uniformly identified, risk-rated and reported. Positions building up to a corporate risk measure from various legal entities and product portfolios must be explainable from the shareholder's and risk manager's perspective as it relates to factor sensitivity. When these measures do not reconcile transparently, the boards of directors of these holding companies are often scrutinized by investors and regulators.
With that said, typically each source system uses different data formats, granularities and taxonomies, so profiling, cleaning and normalizing the data becomes extremely time-consuming – usually several hours depending on the volumes of data. Essentially, we end up with an end of day T+1 risk-reporting cycle. If there are any hiccups in the above process, then there is not enough time to remediate the issue, and the risk reports end up being inaccurate.
Sidebar: Some firms are mitigating this by using proprietary APIs from each source system. Usually, the normalization and data-cleansing rules get embedded in some hard-coded application layer. In the case of SAS, the normalization happens in our event-stream processing engine with embedded data-quality rules – a much more scalable and robust solution.
Not only that, the reports generated from this process are also fairly static: the reports present risk profiles along pre-defined hierarchies, and changing the hierarchy now becomes a programming exercise which gets pushed into a queue and prioritized.
It is critical for risk managers working in today’s volatile markets to have 1) timely, accurate and granular data, 2) analytical horsepower to crunch the data and 3) a self-service on-demand reporting and exploration environment that allows firms to monitor emerging risks and test out new hypotheses to make timely decisions.
How are firms currently sequencing, re-pricing and recalculating portfolios?
Banks use a combination of techniques: approximation, full revaluation and others. Usually, these are desktop-pricing tools sitting on the trader’s desk. The challenge is that the price of the trade still does not reflect the incremental risk of that trade on the firm – whether it’s from a counterparty concentration, collateral, liquidity or regulatory perspective.
How are firms conducting stress tests to evaluate market, liquidity and credit risks to improve their financial outlook?
Firm-wide stress testing is forcing financial institutions to integrate processes that were previously independent, although Risk and Finance have already been required to rationalize exposures. The Federal Reserve’s Comprehensive Capital Analysis Review (CCAR) mandates firms raise the bar and integrate forecasting from financial planning and capital management into risk views, which requires new processes.
Executive management and the board of directors are increasingly demanding that their corporate risk strategy gets operationalized into the day–to-day operations of the bank, necessitating much better integration of systems across the lines of business.
How has the introduction of high-performance computing platforms, working in conjunction with advanced predictive analytics, improved the ability to evaluate intraday, asset-level portfolio risks and make changes near real-time?
The time has never been better for banks to employ the latest advances in risk management. Today, financial institutions face challenges such as higher volatility, increasing interdependence of markets, growing margin pressure and ever more complex regulatory requirements. So out of sheer economic self-interest, many banks are being forced to re-think – and industrialize – how they create and process risk-related knowledge.
From a SAS perspective, we see high-performance technologies enabling real-time data integration, data quality processes, reporting, evaluations, analyses and decisions on demand – all capabilities that are critical to effective risk management.
Peter Sofarelli is a Director of Sales at SAS specializing in the financial services industry. Mr. Sofarelli is currently responsible for managing four sales teams focused SAS’ strategic accounts. Prior to this role Mr. Sofarelli was part of the SAS Risk Management Practice leading the sales and marketing for financial services. Mr. Sofarelli started his career at Prudential Securities in commodities and has over 20 years of experience in financial services. Mr. Sofarelli holds a BBA in Banking & Finance from Hofstra University.