Pre-Trade Risk and Compliance Analytics hold significant value for alternative and buy-side investment firms. Gravitas' survey indicates that portfolio managers and execution traders want to run real-time (both qualitative and quantitative) impacts on the portfolio by adding or removing position(s). Moreover, the flexibility to analyze in two different dimensions is paramount. The first dimension, portfolio hierarchy, starts from position level and goes up to fund level using aggregations of Asset Class, Region, Country, Industry/Sector, Strategy, Counterparty, etc. The second dimension, relevant risk and compliance statistics, includes Exposure, Volatility, Correlations, Expected Tail Loss, VaR, Beta, IR01, CS01, Restricted Assets/Issuer and Limits on Exposure/Risk statistics.
As per our extensive study and research, the robust Pre-Trade Analytics module discussed above should have the following features to cover risk and compliance functions:
- Best in class user interface to allow users to manipulate positions, portfolio, time series and reports on the fly.
- The Pre-Trade Analytics module is backed by a world-class industry standard multi-asset class risk engine on the backend.
- Allow the user to choose any combination of two dimensions with the provision of building new buckets in each of the dimensions on demand.
- Access to live market data for running real-time “What-if” analysis that allows user to add/remove positions and calculate analytics on dynamic basis.
- Display results of “What-if” analysis on side-by-side basis for old and new portfolio.
- Run hedging calculations with one or more hedging instruments (Swaps, Futures, Option, CDS etc) to come up with best hedge trade that optimizes one or more risk statistics.
- Allow to set risk limits at any aggregation level of portfolio hierarchy.
- Provision of soft limits for warning and hard limits for risk committee escalations and subsequent liquidation perspective.
- Restricted Asset/Issuer list at all portfolio hierarchy levels and ability to generate warning and violations in case of breaches. Option of manual override to convert warning into working order with approval process.
- Audit trail of all compliance violations with information of user, date and time, security ID of trade and text of compliance rule violated.
The aforesaid tasks come at a certain expense. For example, access to real-time market data for risk and compliance calculations imposes huge monetary cost for funds. However, Gravitas found that this cost can be optimized by defining the universe of instrument list and maintaining the time series of pricing and reference data in an internal data warehouse that is fully integrated with the Pre-Trade Analytics module. For many non-exchange traded instruments, close of business market data can be used for intraday calculations in “What-if” scenarios and hedging calculations with good accuracy.
Apart from monetary costs, Gravitas found computational effort and turnaround time required for advanced risk statistics to be very high in the case of a bigger non-equity dominated portfolio, which can be worrisome for many buy-side clients. Gravitas was able to deal with this problem by defining the instrument universe, doing a simulation and scenario generation process in an overnight batch and then storing the PnL and risk distribution in a data warehouse for subsequent intraday calculation with good approximation.
Shyam Prakash leads engagement with clients to co–source their enterprise risk framework. Shyam’s group is responsible for generating, validating and analyzing risk statistics and reports for fund senior management, investors and regulators. He has executed various risk consulting projects for mid-sized hedge funds and Global Investment managers in Market Risk, Credit Risk, Asset Allocation and Performance Attribution domains. Prior to joining Gravitas, Shyam spent five years at Deutsche Bank in various roles including Synthetic Fixed Income and Quantitative Credit Risk management. He holds a Bachelor of Technology from Indian Institute of Technology (IIT), Bombay.
Rahul Gupta manages the risk co-sourcing function for buy-side firms and provides comprehensive risk solutions and investor reporting services to clients. Rahul joined Gravitas from Credit Suisse, where he traded rates products and advised banks on the effective use of bank capital. Prior to trading, he was a Credit and Market Risk Manager at Credit Suisse dealing with a spectrum of cash and OTC products and creating new risk methodologies. Before Credit Suisse, Rahul was a manager with Citigroup, helping banks with delinquencies and securitization of mortgage portfolios.