Enterprise-wide risk management & Internal auditing:How can technology help?Rik van de Weerthof

Program Manager Risk Management

SAS Europe, Middle East and Africa

Copyright © 2000 , SAS Institute Inc. All rights reserved.

Agenda Determination of topic, goals and challenges How can technology help?:

success criteria practical implications and advantages

Agenda Determination of topic, goals and challenges How can technology help?:

success criteria practical implications and advantages

Topic:Enterprise wide risk management

ERM is the process of identifying, measuring and controlling the effect of internal and external factors that (can) negatively affect the value of a company.

Goal:Managing the ERM Process

riskfactors

riskfactors

risk objects

risk objects

riskmea-sures

riskmea-sures

riskappe-

tite

riskappe-

tite

loss profit

uncertainty

beha-vior

beha-vior

R

Goal:Managing the ERM Process

modelsmodels

riskfactors

riskfactors

risk objects

risk objects

riskmea-sures

riskmea-sures

riskappe-

tite

riskappe-

tite

loss profit

uncertainty

beha-vior

beha-vior

R

Challenges:The 6 biggest issuesCombining different risk typesTimeliness of figuresGuaranteeing accuracy of figuresInterpreting the analytical resultsRunning out of (computer) steamQualified personnel

Combining different risk types

Different risk types:•credit risk•market risk

•FX risk•IR risk

•legal risk•operational risk•etc.

Different risk factors:•counter party default•market risk

•FX rates•Interest rates

•legal structure •fraud, human errors

?Different risk measures:•Credit VaR•Market VaR

Total risk < sum of all risk types

Timeliness of figuresMain Entry: time·lyPronunciation: 'tIm-lEFunction: adjectiveInflected Form(s): time·li·er; -est1 : coming early or at the right time2 : especially suitable for the time <a timely book>

- time·li·ness noun

Guaranteeing accuracy of figures

VaR = 150 Mln with 95% confidence

VaR = 400 Mln with 98% confidence

Guaranteeing accuracy of figures

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

Confidence level

VaR

95,0% 99,9%

Interpreting the analytical results“ Dear CEO:

Our Value at Risk is USD 5,000,000!”

“ Dear Auditor:

What the !@&*# does that mean for my company?”

Running out of (computer) steam 5,000 trades per day 100 positions 100 risk factors Suppose you want to do a Monte Carlo simulation

with 100,000 replications 100 * 100 * 100,000 = 1,000,000,000 calculations

Challenges:the 6 biggest issuesCombining different risk typesTimeliness of figuresGuaranteeing accuracy of figuresInterpreting the analytical resultsRunning out of (computer) steamQualified personnel

Agenda Determination of topic, goals and challenges How can technology help?:

success criteria practical implications and advantages

How can technology help?:Success criteria All major analytical techniques, within a single

environment Full parametrisation of analysis attributes Portfolio-driven data model Full Repricing Incorporate new instruments and pricing models Create and adapt instrument and model attributes Analyses integrate different risk types Traceable calculation processes with user intervention Market modeling Clear and concise drill-down reporting Web reports / GUI Data Management

Design specifications All major analytical techniques, within a single environment No need to jump between specialist packages..

Any number of different analyses can be

performed in a single run.

Design specifications Full parametrisation of analysis attributes Users must be able to customize the

specifications of the various parts of the risk analysis process.

Users must be able to mix and match different

specifications as needed for different analysis

projects.

Design specifications

Portfolio-driven data model

No fixed data model.

Ability to configure data model from an existing

database schema.

Ability to process data “as is”.

Ability to pull data together from numerous

heterogeneous data stores.

Design specifications

Incorporate new instruments and pricing models

New instrument types configured easily.

User selects and installs pricing models.

No restrictions on pricing models.

Any number of vendor supplied or user written

pricing libraries can be installed.

Design specifications

Analyses integrate different risk types

Market risk and credit exposure handled

within the same framework.

A unified and logical architecture:

Consistent use of data definitions, calculation

methods, representation of figures, …

(Un)conditional risk measures

Design specifications

Trackable calculation processes with user intervention

Not a black box.

User can define and control key calculations.

Intermediate calculations can be stored and

examined for additional processing or validation

checks.

Design specifications

Market Modeling

Powerful nonlinear statistical modeling features

can be used to specify and fit models of market

dynamics.

Design specifications Clear and concise drill-down reporting All analytical results can be broken down or

aggregated.

You can slice and dice the risk measures for a

portfolio across any set of dimensions that you

choose to define (by region, counter-party,

instrument type, …).

Marginal and Conditional risk measures.

Design specifications Web reports / GUI

Web ServerJava-enabled web browser

Risk Server

HTTP

HTTP

Design specifications

Data Management A true risk management solution has extensive

possibilities for data access and data processing. Must include extensive back-end data

warehousing software.

True differentiators...Openness, extensibility, flexibilityData management Clear and concise reportsState of the art risk engineMarket modeling

leading to true business advantages

Agenda Determination of topic, goals and challenges How can technology help?:

success criteria practical implications and advantages

“To manage a business well is to manage its future; and to manage its future is to manage information.” Marion Harper

“Managing risk is managing the future.”Rik van de Weerthof

+

=

“Managing risk = Managing information.”

Some quotes...

time-oriented data coming from multiple applications according to subjects meaningful to the

business driven by the need to inform decision

makers

Technology helps organising

Operational Systems

Get data IN

Large volume of Simple transactions

Static applications

Automates Routine Tasks

Business Intelligence Systems

Get information OUT

Small number of Complex queries

Dynamic applications

Enables Creativity

Technology can fulfill an operational or a business intelligence role

Product

Distribution

Credit rating

Geographical

Time (to maturity)

Counter party Type

Loans portfolio

Option book

Equity book

Ctpty

Ctpty Type

All Ctpty

>A

B-A

C-B

Junk

<1 yr

3-5 yr

Office Country Region Enterprise

Daughter

Enterprise

1-3 yr

5-10 yr>10 yr

Technology organises the information dimensions

Drill down

Technology gives insight in multidimensionality

Technology gives insight in multidimensionality

Technology supplies insight required for taking appropriate RR decisions

modelsmodels

riskfactors

riskfactors

risk objects

risk objects

riskmea-sures

riskmea-sures

riskappe-

tite

riskappe-

tite

loss profit

uncertainty

beha-vior

beha-vior

R

The Power to Know™

The Power to Know RISK

R I S KD I M E N S I O N S

TM