The biggest risk management challenge has been to capture all the exotic risk profiles embedded in MPS’ trading portfolios. Daily processing of the wide range of complex traded deals required a very sound modeling, mapping and feeding approach. It involved capturing and managing more than 30,000 risk factors across interest rates, equities, foreign exchange rates, commodities, inflation rates, credit spreads and volatility surfaces, to manage the risk of around 100,000 priced instruments across 130,000 deals.
Analysis of the risk factors which may impact profits and losses is considered strategic for MPS. Algorithmics provided MPS with an Integrated Market Risk solution, which includes advanced pricing models, scenario generation methodologies, calibration routines and statistical analytical functions. The solution is assisting MPS in measuring the risk inherent across its whole trading book, calculating the widest range of risk measures, and supplying this information to the risk management stakeholders. Deep reporting is available to the front office and after a proper aggregation, is used by MPS’ top management and board of directors.
Giovanni Conti, Chief Risk Officer at MPS said, “It is extremely important for us to be able to analyze our mark to market profit and loss situation at the deepest possible level. This provides the highest standards of disclosure for management reporting at various levels, in order to simplify the interaction between the Board of Directors, the group risk management unit, the business units and the trading floor. We needed accurate and timely measurement and analysis of the requirements for regulatory and economic capital, and we believe that Algorithmics’ solutions can provide us with an integrated, sophisticated approach across the whole bank, helping us to add value for customers and shareholders.
“Common input parameters are leveraged by both the front office system and Algorithmics’ risk management system, with our in-house sophisticated middle office financial control application, assuring independence. Given the modularity of Algorithmics’ solutions, it has been very easy to interface the bank’s control architecture, used by operators, with Algorithmics’ architecture, permitting the front office operators to recognize easily the risk management measures”.
The smooth implementation of this solution has led the bank to extend its contract with Algorithmics, adding a further two solutions. These will allow MPS to measure and manage counterparty credit risk, calculate, allocate, attribute and reconcile economic capital for market and counterparty risk across the banking and trading areas, and together support a proactive approach to enterprise risk management.
Michael Zerbs, President and Chief Operating Officer at Algorithmics said; “We have met many outstanding people in MPS and we believe our collaboration with them has positioned MPS as a benchmark in its implementation of market risk, particularly for many of the functional solutions adopted. We’re very pleased to continue our partnership with them. At Algorithmics we focus on offering our clients risk-aware business applications which support their growth plans and enable them to reduce their total cost of ownership. I am confident that MPS will continue to use our solutions to help them increase their efficiency and grow their business.”
Giovanni Conti, Chief Risk Officer at MPS added, “Thanks to Algorithmics’ framework, we are going to be able to re-use most of the work already done for the market risk project within the counterparty risk projects. This simplifies what would otherwise be very complex projects and leads directly to improved profitability.”