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Inside the Volatility Zone: A Plan for Success

Executive Summary

This paper is speaking to the Middle Office function, controlling Market Risk in an Investment Bank, particularly of the first tier. Analogously then It speaks to the similar function in Asset Management or Life Assurance, it is concerned with issues of compliance and transparency in particular Basel III, IFRS7 and Solvency 2. Inside the Volatility Zone is the conclusion of the concept development work of John A Morrison of Asymptotix and David R Bristow of Siag Risk Management which has been on-going through the period of ‘La Crise’. The aim of the paper is to position Siag Risk management technology solutions and Asymptotix deep domain expertise in the context of the macro business requirement of development of solutions to demands for banking transparency and the micro touch-point of Market Risk quantification where Siag toolsets can instantly solve the challenges of the black hole of the Volatility Zone described in the paper.

Financial institutions are facing a new paradigm in terms of effective market risk management, compliant capital management and full regulatory compliance with the keystones of Basel III, IFRS and a range of new compliance norms from international regulatory authorities. In the context of what has been an unprecedented period of market volatility since 2008, institutional re-capitalisation, liquidity shortfalls, state interventions and punitive response proposals for increased taxation, Glass Steagall type separations and high capital reserve ratios to finance vast regional rescue fund safety nets; it is time to ask the question whether this approach to a solution is optimal for the forward prosperity and health of the Tier 1 investment banking & asset management sector.

In a market risk legacy technology environment which has systematically failed to deliver information visibility levels capable of keeping pace with the new velocity, volume, volatility and complexity of international capital markets; this paper addresses viable alternate solutions available within reach of the latest generation of ultra fast tactical advanced risk modelling and reporting technologies and presents a coherent alternative eliminating or significantly reducing the need for the drastic measures currently under discussion.

Siag as risk management consultants to leading Tier 1 asset management organisations believe strongly in a full and exhaustive modelling of VaR variants, Value at Earnings (VaE) and P&L vectors, with extensive what if scenarios, stress testing and back testing to full portfolio risk adjusted valuation with the highest degree of confidence over a given temporal horizon which it is currently possible to achieve. It is only possible to achieve this degree of accuracy and confidence by considering a full range of risk models taken in conjunction, as any one risk measure in itself cannot be considered to be a reliable indicator of risk exposure. New forms of VaR such as the stressed VaR required under Basel demand that any Tier 1 market risk management system must have the ability to incorporate new measures and metrics as may be required operationally or demanded by regulators for effective risk analysis.

Siag operates through its partnership network in Europe, Asia and the USA. The Siag leadership team is aware that however advanced the Siag Risk Engine and Data Management environment, what really makes the difference to you our client is its people. Siag’s partners are an extension of that. Only the most advanced technology delivered by the most experienced competent people can make the difference to your requirements in the ‘Volatility Zone’ and it is here that Asymptotix stand alongside Siag – able to help. Asymptotix has deep domain expertise in this space and has assisted Siag in the shaping of the Solution Design of the product set described here. This partnership is available to assist you in the challenges addressed in the paper.


It is almost banal to state now that during the last two years, those of us who contribute to the international Investment Banking and Asset Management sectors; whether regulator, asset manager, consultant, thought leader, technology developer or indeed government or central bank have been living in quite unprecedented times. What is emerging as the dust settles on a renewed and strengthened regulatory and reporting panorama? Here is a summary sketch; restructuring of liquidity in many leading institutions, revised norms for risk adjusted asset valuations, balance sheet sanitisation, and increased reserve capital ratio requirements under Basel III. This scenario is causing a fundamental root and branch rethink about the management of this economically pivotal sector, in a standards compliant manner; going forward. The old guard, harrumphing from the sidelines in the old clichés about “good for banking” look more and more irrelevant. “The window is open” and a cold breeze of transparency is blowing in, upon the arcane world of asset valuations and risk pricing in our world. The new philosophies of ‘sustainability’, ‘do more with less’ and yes indeed, ‘fairness’ are no longer on a separate and parallel track to the world of banking and asset management.

As a Doctor considers the needs of an ailing patient prescribing the correct treatment by addressing properly the cause and not the symptoms; the initial international trauma response via massive state interventions has been an extraordinary coordinated management feat, certainly not perfect; but effective so far. However, as the patient remains on the table, in life support, in the post global shock aftermath, are we are now in danger of throwing the baby out with the bathwater? Mixing a metaphor or two, I know but you get the picture.

In the context of the massive macro ‘emergency room’ rescue activity, what is it at the micro level that the individual institution has to do; not only to achieve compliance, but also been seen to achieve compliance in order to assure that this rescue mission is sustainable?

It is superfluous to revisit the well known causes of the patient’s condition; however it is most relevant to consider the surgical intervention and more relevantly the rehabilitation procedures that are suggested by the “crash team” to ensure a full recovery to health. The critical nature of the “victims” condition was amply demonstrated by 750 million USD in TARP funds, Hundreds of millions across Europe in government and central bank interventions, €500 billion in balance sheet asset write downs in 2009 alone in Europe as an interim account and a new emergency fund of €950 billion held in Europe at central level should any more cardiac massage be required in the future.

So; as we have agreed that the patient was very sick indeed, and that the initial intervention was correct from the consultant surgeons, we should now examine a little more closely, how it is proposed that forward care is delivered.

We start at an economic level with the premise that most developed economies have the conflicting drivers of low growth, low consumer demand making a consumer led recovery dubious, over leveraging of consumer credit levels, high unemployment with the relative costs and reduction in treasury income, and most importantly massive public sector deficits and growth / GDP leveraging at levels which have no historical precedent.

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