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Financial Data and the Challenges for the Analytic Use Case

Willi Brammertz, CTO ACTUS

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The model

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Financial contracts

> Financial contract: Central to the system

> What is a financial contract?

> Agreement between two (or more) Counterparties

> To exchange cash flows

> Following a set of rules

> Only deterministic (factual) part of finance

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Financial contract as a set of rules

> Lawyers intention

> Expressed esoterically

> Different languages

> Different expressions within language

> Different expressions even within single bank

> Nevertheless clear in intention and understandable

> Can be substituted by computer algorithms

> Substitution by algorithms is necessary condition for the analytic use case

> The number of rules and their combination is limited (coverage 98+%)

> One specific set of rules we call Contract Type (CT)

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A closer look at financial contracts

Endre vullumsandio dion endipsummy nos dolobore vel ut alis amet autem dionseq uismodigna feumsan dionse dolor ullandre magna feuipsummy nullum ad tin ….

Bank shall pay the sum of __________ USD on __________ (date) to ______ (obligor). Obligor will pay an interest of ____ % on a semi-annual basis and repay the full amount in 3 years.

Date, Signatur

2013.01.011000Mr. xzy 10

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Variations

Endre vullumsandio dion endipsummy nos dolobore vel ut alis amet autem dionseq uismodigna feumsan dionse dolor ullandre magna feuipsummy nullum ad tin ….

Bank shall pay the sum of __________ USD on __________ (date) to ______ (obligor). Obligor will pay an interest of ____ % on a semi-annual basis and repay the full amount in 3 years.

Date, Signatur

2013.01.0110000Mr. xzy 10

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More variations

Endre vullumsandio dion endipsummy nos dolobore vel ut alis amet autem dionseq uismodigna feumsan dionse dolor ullandre magna feuipsummy nullum ad tin ….

Bank shall pay the sum of __________ USD on __________ (date) to ______ (obligor). Obligor will pay an interest of ____ % on a semi-annual basis and repay the full amount in ___ years.

Date, Signatur

2013.01.0110000Mr. xzy 10

2

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Even more variations

Endre vullumsandio dion endipsummy nos dolobore vel ut alis amet autem dionseq uismodigna feumsan dionse dolor ullandre magna feuipsummy nullum ad tin ….

Bank shall pay the sum of __________ USD on __________ (date) to ______ (obligor). Obligor will pay an interest of ____ % on a semi-annual basis and repay the full amount in ___ years.

Date, Signatur

2013.01.0110000Mr. xzy 10

2

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CT´s and master agreements

> Master agreements define every aspect of financial contracts

> Terms and their interpretations

> Algorithms (e.g. interest calculations, option pay off…)

> CT´s can be interpreted as

> Set of global master agreements

> Consistent master agreements across sectors

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Data and algorithmsExample of interest calculation I

> Creditor and debtor agree to exchange periodic interest payments

> This cannot be expressed by data alone. We need

> Data

> Algorithms

> Data

> Interest rate

> Principal and its evolution

> Payment cycles

> Day Count Methods, End of Months Conventions, Business Day Convention

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Data and algorithmsExample of interest calculation II

> The actual payment must be calculated using data and the algorithms

> Interest payment algorithm needs

> Cycle algorithm

> EoM

> BDC

> Yearfraction calculation (DCM)

> Principal algorithm

> Etc.

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What can we learn?

> It´s not about data only. It´s about

> DATA AND

> ALGORITHMS

> A financial contract needs both

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An analogyDNA and gene expression

DATA ALGORITHMS

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DNACT

DNA

>DNA information

>Gene expression

>Context sensitive

>Result: Protein, some other results

>Important: Cells are autark in reproduction

CT

>Contract information

>CT specific algorithm

>Risk factor sensitive

>Result:> State contingent cash

flows

> Analysis elements

>Contracts must become autark in results production

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Autark Financial ContractsSelf executing analysis

Riskfactors

Basic Results

DATA ALGORITHMS

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Consequence for XBRLOpen Questions

>XBRL knows how to move data

>Does XBRL know, how to move algorithms along?

>What about the context?

> Input: Risk factors

> Output: Analysis results

Riskfactors

Basic Results

DATA ALGORITHMS

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