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CALYPSO
ENTERPRISE RISK SYSTEM
Dr Philip Symes
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Introduction

Calypso's Enterprise Risk Service (ERS) is part of their
Front-to-Back software system

Calypso ERS provi!es the "i!!le #ffice risk f$nction
%
Risk control an! risk mana&ement sol$tion

'he system is !esi&ne! to mana&e(
%
market risk)
%
cre!it risk)
%
limits

'he *ack testin& f$nctionality incl$!e! in the system
meets the re+$irements from Basel2 ,RB approach

#perational risk is on the roa!map to *e inte&rate!
-
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Contents

Brief overview of the Calypso s$ite of pro!$cts

Brief overview of f$nctionality of Calypso ERS

'echnical overview of Calypso ERS (how it works)

,nte&ratin& ERS with other Front #ffice sol$tions
(Calypso an! other systems)

Scenario metho!olo&y(

.pplication of metho!olo&ies in Calypso ERS)

/istorical sim$lations (!etaile!))

Stress testin&

0atchpoints for risk implementation
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Calypso ERS Areas

Calypso ERS is Calypso's new "i!!le #ffice risk
mana&ement sol$tion

"arket risk areas(
%
Risk factor sensitivities)
%
/istorical Value at Risk sim$lation)
%
Stress testin&)
%
Back testin&

2imits(
%
"arket risk)
%
Co$nterparty cre!it risk

Cre!it Risk(
%
Co$nterparty cre!it e3pos$re
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The Calypso Product Suite

Calypso is a cross asset Front-to-Back #ffice *ankin&
software system

Calypso is !esi&ne! to work 5o$t of the *o36 an! is
confi&$ra*le for specific environments


Calypso's system architect$re makes it hi&hly
confi&$ra*le an! e3ten!a*le(
%
7ricin& li*raries can *e a!!e! in 8ava an! C99)
%
E3ternal !ata*ases can *e reference!)
%
'his makes it appropriate for !ynamic environments

Calypso interacts with other Front an! Back #ffice
systems thro$&h information fee!s
:
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The Calypso Product Suite (cont!

S$mmary
of Calypso
5sol$tions6(
; Calypso
<
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"ront#to#$ac% Inte&ration

Calypso ERS inte&rates with Calypso=s front-to-*ack
software system

'his &ives consi!era*le a!vanta&es when inte&ratin&
risk systems for compliance an! cost

Cost savin&s arise from(
%
,' !epartment specialisin& in fewer systems)
%
2ower licence an! s$pport costs)
%
2ess infrastr$ct$re)
%
2ower set$p costs)
%
. simplifie! systems that re!$ces operational risk

'he system also re+$ires less trainin& for $sers who
only have to learn one system
>
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Calypso ERS Architecture

Calypso ERS separates the $ser interfaces an! *ack en!
processes


'he $ser interface is the ERS 0e* Browser(

'hin-client presentation layer)

0e* services % ?/'"2@ A"2@ etc

'he *ack en! works $sin& ERS en&ines(

. !istri*$te! comp$tin& BR,?)

Service-oriente! architect$re

'he ERS en&ines(

"ana&e portfolio risk analysis)

Cse e3istin& F# pricin& li*raries to create 7D2 vectors
E
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Calypso ERS Architecture (cont!
.!-hoc
Re+$ests
'($C
Data Server
Database
'a)a RMI
Risk
Engines
Risk
Engines
ERS
Engines
Event
Server
TCP*IP or
Multicast
'a)a RMI
ERS Results
'($C
'($C
+e, Ser)ices
(Apache To-cat!
Browser
?/'"2
A"2 F .8.A
+e, Ser)er
S#.7
; Calypso
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Calypso ERS Architecture (cont!

'he Calypso ERS Res$lts service acts as a wareho$se
of official risk n$m*ers(
%
ERS can r$n on Sy*ase an! #racle !ata*ases)
%
Can even r$n on a !ifferent !ata*ase to Calypso

'he service can work with n$m*ers from within Calypso
or from an e3ternal !ata*ase

/istorical scenarios are accesse! !irectly from the
!ata*ase
%
Better performance than $sin& the ?ata Server

'he res$lts can *e e3porte! to !ifferent formats
%
E& "S E3cel for sprea!sheet analysis
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Calypso ERS Architecture (cont!

R$ns off a *atch Ho* overni&ht

'his takes a*o$t 4 ho$rs to perform sim$lations for
1GG@GGG tra!es)

System !oes not r$n in real-time

ERS can r$n in !istri*$te! comp$tin& or BR,?
environment
%
Csin& Calypso ?ispatcher (?C) or ?ata Synapse
(BR,?)

7D2 vectors are $se! as the main *$il!in& *locks of risk
analysis
%
'his is *eca$se I.R is not a coherent risk meas$re
(see RiskMetrics presentation))
%
,n partic$lar@ I.R is not s$*a!!itive
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Calypso . ERS Inte&ration

Calypso ERS $ses the same pricin& environment as
Calypso
%
'his means that the same pricin& li*raries are $se!
%
'herefore ERS !oes not nee! a separate pricin&
metho!olo&y

ERS co$l! *e accesse! from the Calypso BC,
%
'his wo$l! re+$ire !evelopment work
%
'he .7, allows ERS e3tensions

'he *$cket he!&e f$nction is availa*le

"ore work on this is on the 5roa!map6

B$t ERS is not a F# system
1-
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Si-ulation Methodolo&y

ERS !eals is mainly a historical sim$lation I.R en&ine

7ortfolios are reprice! *ase! on the sim$late! res$lts

'his reval$ation is !one *y creatin& a new pricin&
environment (7E)

'ra!es are reval$e! $sin& this 7E to &et a 7D2 vector of
chan&es in the tra!e's net present val$e

Each vector element is the 7D2 for one !ay in the
sim$lation perio!

I.R is calc$late! from these 7D2 vectors

'hey are store! for tra!es an! portfolios
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Si-ulation Methodolo&y

'he risk factors $se! are the same as the $n!erlyin&
market !ata factors $se! for pricin&(

,nterest rates

Cre!it sprea!s

E+$ity prices

Forei&n e3chan&e rates

Iolatility

'hese are not correlate! % the portfolios are H$st
reval$e! *ase! on RF chan&es from fee!s

'hey are then fe! into a set of historical sim$lation
vectors
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Si-ulation Methodolo&y

E3treme ret$rns are mo!elle! in the same way as other
ret$rns if they occ$r in the historical perio!

Jo time-*ase! scalin& is !one at the moment@ *$t
f$nctionality for this will *e a!!e!

0ith e3ponential wei&htin& a!!e! to the volatility@ for
e3ample@ the !ecay factor λ moves away from G(
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Si-ulation Methodolo&y

'he implie! ret$rn on the risk factors is $se! to chan&e
the yiel! c$rve with an(

.*sol$te chan&e (ie Kx *ps)

Relative (fractional) chan&e

0ei&hte! percenta&e chan&e

'he Calypso pricin& mo!el is then $se! to price the
pro!$ct off the new chan&e in $n!erlyin& factors

. warnin& is &iven if there is not eno$&h historical
!ata for the perio! re+$ire!

Jo !rift is mo!elle! in these scenarios

1-!ay or 1G-!ay I.R is the main res$lt

?rift is not sensi*le *elow L- month horiMon
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Si-ulation Methodolo&y (cont!
; Calypso
Group Group Group Group
Desk Desk Desk Desk Desk Desk
Total
Org. Org.
PnL Vectors
VaR
VaR
VaR
VaR
VaR
PnL Vectors PnL1
PnL2
PnL3
.
.
.
PnLn
PnL1
PnL2
PnL3
.
.
.
PnLn
PnL1
PnL2
PnL3
.
.
.
PnLn
PnL1
PnL2
PnL3
.
.
.
PnLn
PnL1
PnL2
PnL3
.
.
.
PnLn
PnL1
PnL2
PnL3
.
.
.
PnLn
PnL1
PnL2
PnL3
.
.
.
PnLn
PnL1
PnL2
PnL3
.
.
.
PnLn
PnL1
PnL2
PnL3
.
.
.
PnLn
PnL1
PnL2
PnL3
.
.
.
PnLn
PnL1
PnL2
PnL3
.
.
.
PnLn
PnL1
PnL2
PnL3
.
.
.
PnLn
PnL1
PnL2
PnL3
.
.
.
PnLn
PnL1
PnL2
PnL3
.
.
.
PnLn
PnL1
PnL2
PnL3
.
.
.
PnLn
PnL1
PnL2
PnL3
.
.
.
PnLn
PnL1
PnL2
PnL3
.
.
.
PnLn
PnL1
PnL2
PnL3
.
.
.
PnLn
Portfolio Hierarchy Leaf Nodes
Results
Generate
Scenarios
Tie
Series D!
Scenarios
"alypso
DS#D!
Trades
fro
G$%
&kt Data
'OD
Trades
(eed
Siulation
Re)uests
Scenarios
&arket Data
Trades
'RS
'ngines
'*ternal
Syste
PnL Vectors
+ggregate
Scenarios
,&L
'*cel
Scenarios
Total
Org.
Group
Desk
P&L1
P&L2
P&L3
.
.
.
P&Ln
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/istorical Si-ulation

Calypso ERS takes historical !ata from an e3ternal price
history !ata*ase

,np$t can *e fractional@ relative or a*sol$te


From these prices@ the shifts in risk factors are
calc$late!

'he perio! for collectin& the historical !ata can *e
specifie!( 1 year@ 1 years@ etc

Forecast horiMons are confi&$ra*le( 1 !ay@ 1G !ay@ etc


'he historical !ata set can *e $p!ate! at c$stomisa*le
perio!s( !aily@ monthly@ etc
1E
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Credit Ris% Si-ulation

Cre!it risk is !one thro$&h cre!it e3pos$res(

'he Mark-to-Market Plus Add-on metho! is $se!)

'his is a stan!ar! techni+$e (Basel ,)

"arkin& to market is !one $sin& the Calypso pricin&
li*raries applica*le to each pro!$ct(
%
'his &ives the c$rrent val$e of the cre!it e3pos$re)
%
Can $se the same pricin& environment as the Front
#ffice)
%
'his means that no appro3imations or price
mismatches come from the risk system
2G
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Credit Ris% Si-ulation

.n a!!-on is ma!e for potential f$t$re e3pos$re market
%
,e@ the a!!-on acco$nts for the volatility of the
pro!$ct)
%
,t acco$nts for the risk that e3pos$re may increase
over time

'his a!!-on is time an! pro!$ct !epen!ent typically
varies *etween(

G-2N for ,R pro!$cts)

1->N for FA pro!$cts)

4-1GN for e+$ities
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Credit Ris% Si-ulation

'he MTM plus add-on metho! is fast an! conservative
in its risk ass$mptions(

B$t it is consi!ere! o$t!ate! *y many *anks)

Potential Future Exposure (7FE) is the propose!
new metho!

.n improve! cre!it risk han!lin& system will *e rea!y
within the ne3t few months

?evelopment foc$s shiftin& towar!s cre!it risk

'his new system will han!le collateral thro$&h Calypso=s
collateral mana&ement system

'his will *e Basel 2 compliant
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$ac% Testin&

Basel2 re+$ires that *anks *ack test their I.R mo!els


Calypso ERS meets this *y showin&(

'he act$al 7D2)

'he no-action (hypothetical) 7D2

'he I.R an! 7D2 res$lts are store! every !ay for each
portfolio

'he *ack test analysis is performe! a$tomatically at the
specifie! perio!

'he analysis checks for the n$m*er of times the act$al
7D2 e3cee!s the I.R
%
Classification is in Basel2 colo$rs( re!@ yellow or &reen
2-
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Stress Tests

Stress testin& scenarios are nee!e! to complement
sim$lations

See RiskMetrics presentation for more !etails

'hese are set$p in Calypso $sin& the Scenario E!itor
%
Shocks to the portfolio@ e& ,R steepeners@ are *$ilt
into the Workspace of the main Calypso system

'he Calypso scenarios analyses are $se! in ERS

2ess !rill!own f$nctionality is provi!e! in ERS than
Calypso

7ortfolios can then *e reval$e! *ase! on these
scenarios an! the res$lts can *e s$mmarise!
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Stress Tests

. c$stom stress test in Calypso=s Scenario Editor(
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Li-its

. new Calypso 2imit En&ine limits the risk of a portfolio
%
#ther Calypso systems will *e mi&ratin& to this)
%
Sin&le en&ine will mana&e all limits in Calypso

2imits can *e place! on "arket Risk factors(
%
Risk factor sensitivity)
%
I.R limits)
%
Stress limits
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Li-its

2imits are place! on Cre!it Risk factors(
%
E3pos$re limits per co$nterparty)
%
2e&al entity hierarchies are applie! to co$nterparties)
%
.vaila*ility of assets (li+$i!ity)

2imits can *e confi&$re!(

2imits can *e set at at !ifferent perio!s

realtime@ intra-!ay or en! of !ay)

2imit e3ceptions are pro&ramma*le in the Calypso
workflow
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Si-ulation Reports

ERS has access to the Calypso Risk Reportin& 'ool via
the Calypso BC,

Res$lts are s$mmarise! $sin& I.R(

?ifferent confi!ence levels can *e selecte!@ e&
EEN)

I.R histo&rams are !rawn)

?escriptive statistics are presente! in the reports)

Risk an! ret$rn meas$res@ e& R.R#C@ are not
incl$!e!


Risk amo$nts can *e attri*$te! to !ifferent factors

Risk can *e shown !$e to FA@ ,R@ etc

?rill-!own f$nctionality shows risk *y !ifferent criteria(
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Ad)anta&es o0 ERS
ERS has several a!vanta&es over lar&er systems(

Spee!
%
Fast system with little overhea! that can r$n off
e3istin& architect$re

,nte&ration with e3istin& Calypso F# an! B# systems

Small infrastr$ct$re an! reso$rce overhea!s

'his makes the system s$ita*le for *anks with short
term positions with he!&e f$n! clients

.lso s$ita*le for lar&er he!&e f$n!s where
infrastr$ct$re e3ists
2E
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+atchpoints

Certain key parts of the proHect m$st *e monitore!
%
See the POC Kit for more !etails

'he ne3t few sli!es !eal with points in - key areas of
proHect implementation from philipsymescom=s
e3perience(

7roHect level watchpoints)

B$siness level watchpoints)

?ata watchpoints
-G
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Pro1ect +atchpoints


'he scope of the proHect(

"$st have !etaile! re+$irements !oc$mente!)

Jee! to *e aware of 5scope creep6

7ro!$ction release cycle(

.nalyse testin& re+$irements (7#C))

Ens$re the release is controlle! (implementation)

.ll elements of the proHect sho$l! *e properly
!oc$mente!

.cceptance (s$ccess) criteria for the proHect m$st *e
pre-!efine!
-1
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$usiness +atchpoints

B$siness nee!s to $n!erstan! the risk meas$res *ein&
presente!(
%
'his incl$!es I.R@ stress tests an! e3pecte!
shortfall)
%
Stakehol!er involvement is essential


Systems inte&ration(
%
Software systems m$st *e compati*le)
%
Cse *ankin& an! in!$stry stan!ar!s where possi*le

-2
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(ata +atchpoints

?ata re+$irements are always $n!erestimate!(
%
,n ho$se !ata so$rces prefera*le)
%
Jee! to analyse &aps in re+$ire! !ata

?ata an! systems m$st *e inte&rate!(
%
Calypso ERS $ses F# pricin& li*raries)
%
Jee! the a*ility to !rill-!own on !ata provi!e!)
%
Share! asset control across *$siness $nits
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Su--ary

ERS is Calypso's new risk service offerin&

,t is !esi&ne! to inte&rate with e3istin& Calypso systems
an! other Front #ffice systems an! pricin& li*raries

ERS incl$!es s$pport for(

/istorical sim$lation)

Basel 2)

Stress testin&

Res$lts are s$mmarise! as reports(

Risk n$m*ers are han!le! thro$&h 7D2 vectors)

I.R meas$res are calc$late! from these)

'hese meet re&$latory re+$irements@ e& Basel2