Tools that enhance risk management framework
One of the biggest challenges managers have faced in the last couple of years has been greater regulation. In parallel with investor demand for transparency, having the right risk infrastructure in place to handle regulatory and client reporting has become de rigeur.
That means having an even greater understanding of risk throughout the lifecycle of an investment strategy: from pre-trade risk exposures to leverage levels, margining management, liquidity profiling, real-time risk analysis, post-trade impact on P&L, through to risk reporting and compliance.
“Regulation is forcing managers to think carefully about risk and to be able to accurately report it in a standardised fashion,” says Jerome Lafon (pictured), buy side product manager at Misys.
Under the AIFM Directive, managers will have a regulatory obligation to report their risk figures. Sophis VALUE is an integrated solution offered by Misys. Modular in nature, it supports managers from front through back, including risk management and compliance, providing a single consolidated view of a multi-asset portfolio. Part of that solution is a reporting tool that enables managers to customise their reports for regulators and investors.
“It enables clients to produce reports in an automated fashion at the end of each day, which can then be emailed directly to investors or to the regulators,” explains Lafon. “Investors won’t allocate to a fund manager today who isn’t able to clearly articulate their risk management framework, or explain the figures. In this regard, investors are becoming a lot more demanding.”
Misys has recently enhanced Sophis VALUE in two areas to further support managers’ day-to-day risk management operations.
The first enhancement allows managers to run pre-trade simulations and compliance verification checks on a wide range of instruments including equities, OTC derivatives and listed derivatives: previously this was only possible for listed derivatives.
“Managers can perform risk management calculations at the pre-trade level to determine how a trade will impact the book. They can also check that no excess risk is being taken by simulating different trading scenarios and monitoring what impact their trades will potentially have on VaR, leverage levels, etc.”
The second development has been to provide an initial margining calculation for managers as the market moves towards OTC clearing under CFTC regulation in the US and EMIR regulation in Europe.
The volume of data involved when clearing trades through central counterparties (CCPs) will, from a margining perspective, present managers with a massive operational headache. Each CCP will use its own calculations for determining initial margin requirements based on VaR calculations.
Misys recognised the importance of developing a tool for Sophis VALUE that could allow managers to run their own initial margin estimations.
“This collateral management tool plugs directly into our VaR engine and allows us to provide managers with an estimation of initial margin at the pre-trade level before they decide which swap to trade. Knowing how much margin will be called is highly important for their cash management process and will help them better manage their collateral needs,” says Lafon.
Sophis VALUE already had a VaR module and a collateral management module in place. What this new solution has done is simply plug them both together.
“An initial margining estimation requires a collateral management solution, a simulation tool, and a risk management system which utilises the same data that is used in the portfolio management system. You need to have all the building blocks in place. Now, we have.”
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