Until very recently, when evaluating counterparty risk banks have had to choose between accessible, timely, simple and less accurate measures of exposure calculated by front office systems and less timely, less accessible but more accurate measures of exposure calculated by end-of-day risk management systems.
But now regulators are pushing banks to be able to calculate counterparty risk accurately within hours if necessary. So it was timely that last year saw the launch of Algorithmic's new Algo Real-Time Credit Engine.
In development since August 2006, but deployed live for international FX trading at a large financial institution for the first time in April 2008, the solution gives banks a real-time view of the credit and settlement exposure of counterparties, with real-time pre-deal checking, intraday reporting on the credit status of a counterparty, and real time feeds to trading desks.
The multi-asset class product is unique in deploying - in real time - multi-step Monte Carlo simulations that use 2,000 scenarios over 63 time steps. Each pre-deal limit check includes: simulation; aggregation into the counterparty hierarchy; calculating the impact of credit mitigants including close-out netting and collateral; and limit checking - which all takes place in less than 20 milliseconds.
The counterparty hierarchy consists of approximately 14 thousand node points. Collateral and netting is modeled consistently with the middle office models. The product also models settlement and, by linking the settlement and exposure processing, is able to correctly model the processing of give-ups for prime brokerages.
The Finextra verdict: Real-time risk is undoubtedly going to be one of the buzzwords of 2009, and with this product Algorithmics is helping banks meet regulatory demands and increase control, and also improve utilisation of credit lines.