Numerix Risk Scenario Framework unveiled

Built on the highly flexible, fully transparent pricing and risk capabilities of the Numerix CrossAsset analytics platform, the robust framework is an easy-to-use scripting language for defining bespoke risk scenarios, stress tests and greeks. The new functionality allows custom implementations of business rules that determine how scenarios are created and how they are applied to individual or groups of trades.

Since the financial crisis, stress tests have been consistently implemented at the largest financial institutions. Now a regulatory requirement, from stressed VaR under Basel capital requirements to Fed reporting requirements in stress testing, CCAR and CapPR compliance - stress tests have become an onerous task, namely the 680,000 hours of annual burden the Fed estimates it takes to fulfill stress test reporting requirements. The implementation of base and bespoke tests is driving banks to seek more automated approaches where a robust stress testing framework can be leveraged for daily risk management purposes, and offer better insight into capital needs, liquidity risks and collateral optimization techniques - while saving considerable time.

The Numerix Risk Scenario Framework - as part of the CrossAsset pricing and risk suite - enables users to quickly and easily assess the firm and portfolio impact to assets due to changes in the environment including market data factors (i.e. index levels, curve shifts, volatility), collateral terms such as margin increases, trade-specific terms like strikes, maturity dates, underlying indexes as well as sensitivities to model parameters. With the Risk Scenario Framework users can define scenarios that are relevant to the business lines, in addition to macro-economic shocks that can impact the risk and finance functions. Custom-defined calculations can be created for stress tests, initial margin, variation margin, hedge ratios and greeks. Users can account for several risk factoactors at the same time by capturing portfolio sensitivity to cross greeks, and benefit from the production of flexible report outputs where data can seamlessly populate pivot tables for slicing and dicing. By identifying the source of risk within a portfolio, users can benefit from better hedging decisions and the ability to aggregate exposure and sensitivities across the enterprise.

"Our Scenario Pricer report is the centerpiece of the framework; it brings together priceable trades, markets, user-defined scenarios and analytics all under one centralized framework. The coherence of this new framework means that one can create a scenario implementing any combination of market shifts using business rules and apply to an individual trade or portfolio of trades - a unique offering in today's market, and a key competitive differentiator for Numerix," said Steven R. O'Hanlon, Chief Executive Officer& President of Numerix. "This innovation will help financial institutions manage the myriad potential risks and market events facing today's global markets, where being successful is not just about having metrics to measure risk over time but being able to work with traders, portfolio managers, risk managers and other practitioners to construct stress tests that are meaningful and give a sense of where the portfolio can withstand severe economic downturns or times of crisis."

Stress Testing - Building a Bottom-up Risk Technology Architecture

Numerix Risk Scenario Framework takes a bottom-up approach to implementation where users can determine coverage, the level of flexibility and complexity needed within the framework. From a complexity and frequency standpoint, today's market participants are looking to develop more complex, short-term scenarios to observe multi-curve sensitivity. As spreads between OIS and Libor rates remain wide, impacting collateralized derivatives exposures, portfolio managers have increased concerns over financing and funding; in addition to managing CSA optionality and future collateral forecasting needs. With the Risk Scenario Framework, one can observe how trades are concentrated by region, sector or strategy and observe behavior under future market scenarios, or what could go wrong if historical patterns reverse.

"Changes in financial market dynamics have shifted and advanced risk measures are needed to monitor and actively manage risk over time, of both trade and portfolio concentrations. This evolution has emphasized the need to design robust stress tests and manage comprehensive risk scenarios from the ground up, where portfolio-level market sensitivities can be used to customize the way risk is viewed and managed," said Satyam Kancharla, Chief Strategy Officer and SVP at Numerix. "Traditionally stress testing drives a fire-drill within an institution, where completion can take several days and weeks. Under Risk Scenario Framework the emphasis is on ease-of-use for customers to be able to take ideas on new scenarios, create them within the framework, run reports and get aggregate results within hours, versus days and months. Furthermore, users can quickly edit and create new scenarios on-the-fly. Once reporting needs are determined, results can then be drilled down to both the trade and portfolio level - where new greeks, CVA/FVA and OIS sensitivities can be used to not only satisfy reporting requirements, but provide a better view of risk across the organization from both a credit and market perspective."