Risk Engine Functionality

Risk Engine (RE) is a software system that provides measurements for market risks and analysis of investments. As an advanced analytical suite, it is applicable in banks, insurance companies, treasuries, investment funds, hedge funds as well as all other companies having an advanced investment / cash management. RE performs sophisticated simulations of market factors'future behaviour (e.g. indexes, yield curves, FX), client behavior (ALM Module) and position cash flows in the presence of market scenarios. In this way, RE users can see the expected future behaviour of investment at different stress levels.

Due to RE's scalability and performance, simulations can be performed at bank level or at its sub-levels that are represented by portfolios. The data access layer provides access to client data from different databases (from single databases or several or several ones; from one database type or different ones) and accepts the import of data via the standard XML import.

RE'architecture enables an easy integration into other existing systems or stand-alone operations, where data exchange is performed through imports and exports. The produced analytical results and risk figures, along with other attributes, can easily be reported, using standard reporters, advanced reporting and OLAP presentation tools.

All RE modules are highly flexible and can be changed according to customer´s needs. The following modules are available now:

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 positions, e.g. first by currencies and then by maturity bonds.
  • Static and dynamic portfolio structuring is possible
  • Market Environment
  • Scenarios
  • Stress Testing
  • Manages the market environment and historical time series:
  • • Instrument prices and dividends;
  • • Yield curve, credit spread curve;
  • • FX rate, stock index, IB rate;
  • • Implied volatility;
  • • Bond future basket;
  • • Multiple markets and providers.
  • Provides means to define different strategies for scenario changes in the market environment in order to compose real-world scenarios, such as crisis, growth, market shocks,
  • issuer defaults, refinancing costs, realised 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. Furthermore, all results are aggregated on each level of the portfolio structure. When multiple scenarios are selected, results can be compared on all levels. The following results are calculated:
  • • Market and theoretical values,profit / loss, return;
  • • Basic sensitivities – durations, historical and implied volatilities, base point value, key rate values, etc.;
  • • Hedging by BPV and Beta;
  • • Scenario projection – portfolio theoretical value, developеd over time, based on selected market scenarios;
  • • Multiple market scenarios applicable.
  • Expected loss is calculated via spread curves assigned to respective issuers or via probability matrix, based on issuer ratings.
  • With derivatives, Credit / Deposit Value Adjustment (CVA/DVA) is provided.
5 Portfolio Optimisation
  • Performs optimisation of risk and return and presents proposals for portfolio restructuring in the presence of different scenarios.
  • The optimisation is performed within user defined restrictions that represent portfolio owner preferences, e.g. investments in EUR > 30% and investments in USD < 40%. The following functions are available:
  • • Markowitz optimisation, including non-linear portfolios;
  • • Efficient frontier calculation;
  • • Portfolio optimisation proposals;
  • • Historical data sets;
  • • Portfolio restrictions;
  • • Market, volatility and value scenarios.
  • Asset Liability
  • Analysis
  • Provides the means to present the disposition of future cash flows and detect any gaps, investment efficiency in the presence of different market scenarios. Additionally, different future behavioural changes (such as growth, defaults of large customers, deposits increase, etc.) can be tested in the presence of cash flow scenarios, in order to optimise the asset and liability management. User defined attributes can be defined for positions, instruments and portfolios. The following functions are available:
  • • Cash-flow disposition;
  • • Interest income / fund transfer pricing;
  • • Liquidity VaR and gap analysis;
  • • Application of multiple market scenarios.
7 Value at Risk (VaR)
  • VaR calculation on all levels of the portfolio structure taking into account the applied market scenario. Results of multiple scenarios can be compared.
  • • Multi-factor Monte Carlo simulation-based VaR calculation, VaR types: total, FX, IR, SI, share, mixed, marginal, incremental, spread, historical.
  • • Market VaR projection over time;
  • • VaR break down by asset classes;
  • • VaR back testing;
  • • Application of multiple market scenarios.
8 Performance Calculation
  • The performance of positions and portfolios is calculated for a historical period, that includes transactions. It is separated into realised, non-realised and FX-effects, which are aggregated along the sub-portfolio hierarchy. Performances can also be tracked against multi-level benchmarks. The following components are included into the calculation:
  • • Market and paid prices at the begin and end date of the historical period;
  • • Accrued interests at the begin and end date of the historical period;
  • • Capital and interest rate in/out payments within the historical period;
  • • Fees and taxes within historical period;
  • • Profit/loss calculation;
  • • Benchmark tracking.
9 Limit and Notification
  • Management of limits, compliances and alerts defined by specialised restriction language that enables a free formulation of limits and an easy description of financial law documents, such as capital investment low, UCITS IV, etc. Designed to produce real time alerts for pre-trade checks.
  • Management of notification events: messages, SMS, e-mails.
10 Service API RE functions are also accessible via its service APIs, which simplifies the integration with other applications. Any client can include the desired functions to its own workflow or create an application mixing services of other providers transparently. All market data are accessible and editable, if the accompanying user rights allow it. The services support multiple users and each user can use its own database. The installation supports vertical and horizontal scaling and can be installed remotely or on premise.
11 Swiss Solvency Test (SST) Flexible definition of SST with standard and custom scenarios. Special mapping of functions between SST recognised risk factors and actual risk factors.

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