Risk Engine Functionality

Risk Engine provides the management of financial objects, for ex. market data (quotes, indexes, rates, etc.), transactions, positions, instruments (incl. insurances), portfolios and scenarios. The analytics include sophisticated simulation of the future behavior of market factors (for ex. indexes, yield curves, FX), client behavior (ALM module) and position cash flows in the presence of market scenarios.

Thus, clients can see expected future behavior of their investment at different stress levels. Due to the scalability and performance of RE, the simulation is performed at bank level and all its sub levels (represented by portfolios). The data access layer provides access to client data in different databases (one or several, one type or different ones) and accepts data import via standard XML import.

RE is applicable as an advanced analytical suite in banks, insurance companies, funds, investment management companies and other similar financial institutions. The system architecture allows easy integration with existing systems or stand-alone operations with data exchange by imports and exports. The produced analytical results and risk figures can be easily reported, together with other attributes, using standard reporters, advanced reporting and OLAP presentation tools.

All modules are highly flexible and can easily be changed and adapted to customer´s needs. The list of modules that is included in RE covers, but is not limited, to the following modules:

Module List Functionality
  • System
  • Administration
  • User rights
  • Lists of instruments, positions, filters, portfolios, scenarios, reports, etc.
  • Register of users, roles and rights to access the system
  • Settings, currencies, countries, cities, markets, financial calendar
  • Asset allocation
  • Portfolio structuring
  • Supports multi-level portfolio re/structuring based on calculation results and position properties. Performs allocation of the positions for example by currencies and then by maturity bands.
  • Static and dynamic portfolio structures are possible
  • Market environment
  • Scenarios
  • Stress testing
  • This module provides means to manage the market environment and historic time series used by all modules
  • • Instrument prices and dividends
  • • Yield curve, Credit spread curve
  • • FX rate, Stock index, IB rate
  • • Implied volatility
  • • Bond future basket
  • • Multiple markets and providers
  • The module provides means to define different strategies for scenario changes in the market environment in order to compose real world scenarios like Crisis, Growth, Market Shock, Issuer Defaults,
  • Refinancing Costs, etc, realized by:
  • • Market scenarios:
  • FX scenario, Stock index scenario, IR/Yield curve scenario
  • • Cash-flow and liquidity scenario
  • Portfolio evaluations
  • Expected Loss
  • All evaluations are performed with regard to a selected market scenario. Further all results are aggregated on every level of the portfolio structure. When multiple scenarios are selected the scenario results can be compared on all levels. Following results are calculated:
  • • Market and Theoretical values, Profit / Loss, Return
  • • Basic sensitivities – durations, Greeks, historical and implied volatilities, base point value, key rate values, etc.
  • • Hedging by BPV and Beta
  • • Scenario projection – portfolio theoretical value development over time based on selected market scenario
  • • Multiple market scenarios applicable
  • Expected Loss is calculated via spread curves assigned to the respective issuers or via probability matrix based on the issuer ratings.
  • With derivatives Credit/Deposit Value Adjustment (CVA/DVA) is provided.
5 Portfolio optimization
  • Performs optimization of risk and return and presents proposals for portfolio restructuring in the presence of different scenarios.
  • The optimization is performed within user defined restrictions that represent the portfolio owner preferences, e.g. Investments in EUR > 30% and investments in USD < 40%.Following functions are available:
  • • Markowitz optimization, including non-linear portfolios
  • • Efficient frontier calculation
  • • Portfolio optimization proposals
  • • Historical data sets applicable
  • • Portfolio restrictions applicable
  • • Market, volatility and value scenarios applicable
  • Asset Liability
  • Analysis
  • Provides means to present the future cash flow disposition and detect any gaps, investment efficiency in the presence of different market scenarios. Also in the presence of cash flow scenarios different future behavioral changes (Growth, Defaults of large customers, deposits increase, etc.) may be tested in order to optimize the asset and liability management. User defined attributes can be defined for position, instrument and portfolios. Following functions are available:
  • • Cash-flow disposition
  • • Interest income / Fund transfer pricing
  • • Liquidity VaR and Gap analysis
  • • Multiple market scenarios applicable
7 Value at Risk (VaR)
  • Value at Risk (VaR) calculation on all levels of the portfolio structure taking into account the current market scenario.
  • When multiple scenarios are selected the results may be compared.
  • • Multi-factor Monte-Carlo based VaR calculation, VaR types:
  • Total, FX, IR, SI, Share, Mixed, Marginal, Incremental, Spread, Historic
  • • Market VaR projection over time
  • • VaR break down by asset classes
  • • VaR back testing
  • • Multiple market scenarios applicable
8 Performance calculation
  • Performance of positions and portfolios is calculated for a historic period including transactions. The performance is separated into realized, non-realized and FX-effects, which are aggregated along the sub-portfolio hierarchy. Also performance can be tracked against multilevel benchmark. Following components are included into calculation:
  • • Market and Paid Prices at begin and at end of the historic period
  • • Accrued interests at begin and at end of the historic period
  • • Capital and interest rate in/out payments within historic period
  • • Fees and Taxes within historic period
  • • Profit/Loss calculation
  • • Benchmark tracking
9 Limit and Notification
  • Management of Limits, Compliances and Alerts defined by specialized restriction language that allows free formulation of limits or easy description of financial law documents like capital investment low, UCITS IV, etc. The module is designed to produce real time alerts for pre-trade checks.
  • Management of Notification Events: Messages, SMS, Mails is included
10 Service API RE functions are also accessible via its service APIs, which makes the integration with other applications very simple. Any client can include the desired functions to its own workflow or create an application mixing services of other providers transparently. All market data, positions, portfolios, etc. are accessible and editable if the accompanying user rights allow it. The services support multiple users and each user can use its own data base (within the list of supported DB types). The installation supports vertical and horizontal scaling and can be installed remotely or on premise.
11 SST Flexible definition of Swiss Solvency Test with standard and custom scenarios. Special mapping of functions between SST recognized risk factors and actual risk factors.

For more information see Swiss Solvency Test (SST) in Risk Engine
12 Solvency 2 Solvency 2 market risk modules and aggregations with full internal model stresses.