5/2/2019 How GPUs Have Transformed XVA Pricing and Risk Calculations - Kinetica

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How GPUs Have Transformed XVA Pricing

and Risk Calculations
Financial risk calculations have become more di cult to assess
every year, and it is essential to use new approaches such as the
X-Value Adjustment (XVA)

Mate' Radalj | February 22, 2018

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Financial risk calculations have become more di cult to assess every year, and it is essential to
use new approaches such as the X-Value Adjustment (XVA), which is a generic term referring
collectively to a number of di erent “Valuation Adjustments” in relation to derivative instruments
held by banks. The purpose of these adjustments is to 1) hedge for losses that may arise from
counterparty default, and 2) to help gure out the amount of capital required under Basel III,
which is the regulatory framework on bank capital adequacy, stress testing, and market liquidity
risk.

Valuation adjustments including the following:

CVA – This is the most widely known and well understood of the XVA. It adjusts for the
impact of counterparty credit risk.
DVA – The bene t a bank derives in the event of its own default.
FVA – The funding cost of uncollateralized derivatives about the “risk-free rate.”
KVA – The cost of holding regulatory capital as a result of the derivative position.
MVA – Refers to the costs of centrally cleared transactions, such as adjustments for the
initial margin and variation margin.

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To put it simply, XVA is about computing potential risk, now and in the future. It re ects the capital
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that a trade consumes over its lifetime, which can either be a source of cost or bene t. The goal
of XVA is to insulate banks from risk where possible and allocate the right capital.

Why is XVA Needed?

Prior to 2007, trades were cleared at fair valuations. The costs for capital and collateral were
essentially irrelevant to banks’ investment decisions. All trading was done without any real
understanding of the value of a trade in the future; there was very little modeling taking place.
This led to increasing complex investment portfolios of variable value, and ultimately, to the stock
market crash in 2008.

Following the crash, major reform took place in the nancial industry. The Basel Accord was put
together to make sure that the banks could model the data and analyze the trades e ectively,
and store the data to measure their exposure at all times. Banks had to make sure that the
trades they were conducting could be capitalized. This requirement represents a massive drag for
a bank, as it can result in additional expense and reduced pro tability. In order for banks to
operate e ciently, play by the rules, and keep the regulators happy, banks needed 1) lots of data,
2) clever forecasting models, and 3) a huge amount of computational horsepower to be able to
compute XVA as the trade occurred, while also re-assessing the bank’s position if there was a
major uctuation in the markets.

XVA Challenges

Real-time, pre-trade XVA measures are extremely complex. They require an enormous amount of
compute power to handle the data being generated. To compute risk, banks have to continually
and comprehensively measure trading activity and currency movements. They must compute the
entire cost of trading, and re-compute if market conditions change signi cantly. Banks have to
take into account these many di erent risk factors using a mix of real-time and batch/static data.

Before GPUs made it into the mainstream, banks had to rely on large numbers of CPUs. Batch
processing simply wasn’t up to the challenge, as banks had to compute risk on hundreds of
thousands or millions of trades per day, with thousands of counterparties in over 20 di erent
currencies.

GPUs to the Rescue

These types of calculations are extremely complex and time-critical; CPUs just don’t have the
processing power to handle the workloads in real time. In addition, banks have to retain and
service the data to traders in real time via a UI for exible data slicing and drilling. Fortunately,
compute-intensive workloads like real-time adjustment calculations are perfect for high-
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performance GPUs, which have over 5,000 cores. For

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example, running a Monte Carlo simulation, which is
used to generate random variables for modeling risk, is
very compute heavy and much better suited to GPUs
than CPUs.

Life After Moore’s Law

Moore’s Law says that the number of transistors that can be packed into a given unit of space will
roughly double every two years. If you want to take advantage of all of these transistors, you need
to do things in parallel. You cannot expect to do things in a single threaded way and expect to get
the desired results.

Rise of GPU Computing

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The chart above depicts the enormous processing potential enabled by GPUs. As Moore’s Law
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tails o , GPUs are picking up and lling the gap, providing solutions like Kinetica with a lot of
valuable horsepower. Since Kinetica leverages GPUs and in-memory processing, banks can now
perform risk simulation computations in real time on data as it streams in when leveraging
Kinetica’s insight engine for the workload.

XVA Architecture

Here’s an example of Kinetica’s XVA architecture that is used at a major multinational bank:

Kinetica Brings Advanced Analytics and Machine Learning to Finance

Kinetica provides a bridge to bring advanced analytics and machine learning into nancial
analysis. Financial institutions are merging more and more sources of data and need to run ever
more sophisticated risk management algorithms and return results pre trade. Kinetica’s user-
de ned function API (https://www.kinetica.com/docs/concepts/udf.html) enables a next-
generation risk management platform that provides real-time drill-down analytics, advanced
machine learning, and on-demand custom XVA library execution. With Kinetica, banks and
investment rms bene t from near-real-time tracking of their risk exposures, allowing them to
monitor their capital requirements at all times.

To experience the power of Kinetica’s instant insight engine, download the trial edition
(http://kinetica.com/trial/) today. And be sure to watch my colleague James Mesney’s talk from last
year’s GPU Technology Conference in Munich: How GPUs Enable XVA Pricing and Risk
Calculations for Risk Aggregation (https://www.youtube.com/watch?v=WxrZsqTRljQ&t=215s).

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