Counterparty Risk Analysis – Enhancing Existing Solutions

Xavier Bellouard |
November 16, 2011

The current complex global financial markets include risks that are distributed across many entities. Credit risk in no longer limited to two parties, a bank and borrower, it now includes a variety of financial products and instruments, which makes counterparty risk analysis a complex process. Properly analyzing and managing counterparty risk is crucial in the current credit environment.

There are various solutions on the market to assist financial institutions in handling the complexities of counterparty risk analysis. However, these solutions usually contain pre-defined scenarios, which limit analysis capabilities. The ActivePivot real time OLAP solution provides capabilities that can assist counterparty credit risk management through analysis of different credit risk scenarios:

  • Integrating calculations including future exposures, dynamic credit value adjustments (CVA), complex netting, and collateral rules
  • Simulating the impact of various strategies for credit exposure in real-time
  • Communicating with management and collaborating on trading decisions in a credit sensitive environment
  • Allowing intuitive navigation to understand where your risks reside
  • Providing real-time CVA sensitivities for hedging CVA desk risk management purposes

Implementing a counterparty risk analysis solution to enhance existing solution

A large European bank wanted to replace its legacy credit risk management system with a solution that would increase its control of risk to meet new counterparty risk management challenges, as well as the regulatory CVA obligation.

The bank was using a traditional data warehouse approach, but this was not meeting the real-time requirements needed by the business. In addition, the front office credit limit application did not provide the flexibility of analysis or the complex netting /collateral arrangements required to make informed decisions. It needed a new approach to consolidating, monitoring, and managing its credit risk in such a way that did not require replacing all of the banks existing systems but instead allowed it to add more sophisticated credit analytics while delivering this information to both the traders and the risk controllers, while controlling IT costs.

In addition, the bank wanted a solution that could support real-time Potential Future Exposure (PFE) calculations but with the non-standard aggregation in the counterparty dimension, large volumes of scenarios, and other complexities. It also needed the ability to analyze the PFEs across various market scenarios and the maturity spectrum simultaneously and have these exposures updated in real-time.

The bank wished to leverage its existing investment in analytics and did not want to buy an all-encompassing “one size fits all” solution. The institution had also identified a need for an aggregation engine as a key component of its credit risk architecture. Following a comprehensive selection process, the bank chose ActivePivot, which is an object-based, real-time aggregation OLAP software component with customizable business logic.

ActivePivot provided the bank with a counterparty risk analysis tool that continuously analyzes rapidly changing data, delivers real-time risk intelligence across to all the participants in the decision process, and enables collaboration on the same true data.

ActivePivot processes the data as it arrives and since ActivePivot uses an in-memory engine it links directly to the source data and all data and user-defined rules are continuously updated to deliver real time insight and alerts. The bank now has a tool for that performs deep analysis of data at real time speed to meet its credit risk management needs.

To try out ActivePivot’s Counterparty Risk Analysis solution, see our live demo.

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About the author

Picture of Xavier Bellouard

Xavier Bellouard

Co-founder & Managing Director
Managing Director with 30+ years experience and dual expertise in financial markets and technology. Result driven, with attention to details, a co-founder of Quotient/Summit, one of the most successful financial software products in Capital Markets, with a wide range of skills, including software design and development, professional services, sales, marketing, business development and people management. Co-founder of ActiveViam a data analytics platform specialized for Financial Services.

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