Operational Process Analysis

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Operational Process Analysis

Challenge

A client had a best in class operational process for its FX business with a 99% STP rate, however, the daily volume of trades meant that a large absolute number of exceptions was generated each day. The client wanted to understand the chain of behaviour that led to exceptions being generated.

  • A data driven approach was required so that unambiguous evidence could be shown.
  • The volumes of data involved across multiple systems meant that a traditional data warehouse approach would be too costly and take too long.
  • Solution

    • Utilise CPAnalytics ability to connect to several disparate data sources to explore the data, without having to build a data warehouse or data model.
    • Layer business rules to connect data across the system to provide a front to back view.
    • The flexible, iterative nature of CPAnalytics means that we and clean and build the links as we
      explore the data.
    • The resulting view allowed us to build the chain of events: how upstream actions led to exceptions
    • The solution was entirely data driven and not based on sampling the available data.

    Result

    Management were provided a view of their business which they had not seen before. CP Analytics’s ability to join up the data to find the patterns allowed the root causes to be revealed. The resulting data discovery model could be implemented in production and run on an automated basis, with alerts based on business rules to detect upstream exception causing events.

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    Season Ticket Securitisation Transaction

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    Season Ticket Securitisation Transaction

    Challenge

    Calimere Point was approached by a major European football club who were seeking to diversify their current sources of financing. Existing long-term financing structures were in place for the client. However, the club had a short-term financing need which sought it to look at alternative sources and structures.

    Solution

    • Calimere Point carried out a detailed analysis of the current financing structure of the football club.
    • The analysis included developing a cash flow model which enabled the client to assess the evolving financial position and the impact of any short term debt financing.
    • Once the optimal debt structure was determined, Calimere Point presented a number of different financing options.
    • The client determined that season ticket securitisation offered the optimal solution.
    • Calimere Point approached funding providers on behalf of the client and acted as intermediary between the parties.

    Result

    The result was that the Football Club achieved the target season ticket financing structure at a highly competitive funding rate.

    Long Dated Repo Mark to Market Validation

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    Long Dated Repo Mark to Market Validation

    Challenge

    Recent market events have shone the spotlight on products that have less liquidity than was implied from their secondary market activity during more benign periods.  Structured credit products did of course come under particular attention from regulators and politicians, however, our client also wanted to assess other markets that may not have sufficient mark to market transparency.
    In particular, our client’s risk management function was concerned that the long dated credit repo market suffered from a lack of standard market curves; lack of third party data sources and multiple pricing drivers which made validation of mark to market levels challenging.

    Solution

    • CPRA analysed the client data and decided to utilise its application, benchMARK, to assess the internal consistency of the repo marks by identifying benchmark trades and measure the degree of divergence of internal marks from these benchmark trades.
    • benchMARK allowed easy identification of internal marks that diverged significantly from benchmark trades and provided summary statistics of the amount of divergence.  Users, via an intuitive GUI, could change the criteria of the benchmark trades and the aggregation level of the summary statistics.
    • The solution was light touch, as it integrated on top of existing risk data systems.

    Result

    benchMARK allowed rapid and straightforward validation of the repo mark to market levels.  A graphical output allowed the client to quickly identify marking patterns or behaviour which was inconsistent, it also identified a directional trade bias that warranted further investigation.

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    Model Validation

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    Model Validation

    Challenge

    As part of the migration to a new system, our client, a top US investment bank, required certain derivative valuation models across FX, interest rates and equity to be validated. An essential part of the process was to provide insight into the generally accepted market practices for valuing these financial instruments and not restrict the validation to a purely academic exercise.

    Solution

    • CPRA discussed the valuation principles for each product type, as well as market standards and conventions, to enable the client to decide what models to use as the base case for each product type.
    • Regression tests were designed and implemented for each product, including drill-downs into their vanilla components, to ensure that the valuation and risk numbers could be systematically checked with multiple cross-checks

    Result

    • Comprehensive documentation for the products and models was provided, including synopses that could be directly forwarded to clients who wanted an understanding of the valuation and risk calculation procedure.
    • Where appropriate, model shortcomings were documented and proposals were provided to address the issues.
    • CPRA was asked by the client to develop a model that was more appropriate for a particular asset type following the client’s review of the validation results.
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    Structured Credit Portfolio Stabilisation

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    Structured Credit Portfolio Stabilisation

    Challenge

    A client with a structured credit portfolio required support to obtain a clear understanding of the portfolio risk and potential hedging strategies. The portfolio consisted of ten overlapping equity and mezzanine CDO and CLO tranches with 3-8 years to maturity that contained over 1,100 underlying reference credits and illiquid, unequal exposures.

    Solution

    • A detailed portfolio analysis was undertaken that demonstrated that a subset of 78 underlying reference credits accounted for 95% of the portfolio risk.
    • Hedging solutions and structures were assessed.

    Result

    • The client was presented with a portfolio summary and detailed risk attribution report and a range of solutions to hedge the risk.
    • The central solution focused on hedging the risk of two main components i) mark to market exposure of the 78 reference credits and ii) residual default risk.
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    Quantitative development and implementation

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    Quantitative development and implementation

    Challenge

    A blue chip investment bank required support for the development of Comprehensive Risk Measure (“CRM”) a new regulatory capital charge on structured synthetic credit assets. The regulator’s requirement had to be interpreted, fulfilled and a solution implemented in a practicable manner. A directly relevant skill set was required as the underlying assets were complex, as was the CRM methodology.

    Solution

    • CPRA provided a consultant with on-desk CDO experience, which allowed the client to utilise CPRA’s real world, not academic, understanding of the issues and solutions.
    • The role initially focused on the documentation of methodology but as the consultant’s skill set was made clear to the client it expanded into:
      – Development and determination of the methodology for simulation of correlation credit instruments.
      – Analysis and review of historical market data, including cleaning routines, for simulations.
      – Development of testing framework and suitable test portfolio that fairly represented the client’s
         portfolio risk.
      – Analysis of output of market evolution programs to ensure validity of results and market realism
      – Assessing the drivers of the calculated CRM figure.
      – Support the design and production of the reporting requirements for CRM including diagnostics
         and CRM-explain reports.

    Result

    The consultant became a key part of the development and implementation team and the methodology successfully received regulator approval.

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    EPE Optimisation

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    EPE Optimisation

    Challenge

    A major European Investment Bank’s trades were failing to be processed via internal expected positive exposure (“EPE”) methodology, leading to received detrimental current exposure method treatment for counterparty credit risk RWA purposes.

    Solution

    • CPRA provided both subject matter expertise and project management to address populations of trades that were failing to be processed via the internal regulatory approved EPE methodology.
    • Two distinct workstreams were created to solve the main issues that were identified:

      A prototyping workstream to deal with trade populations that did not have a valuation methodology in the existing EPE calculation engine. Front office valuation engines were used to generate pathwise PVs that were then passed into the EPE engine to carry out portfolio level aggregation. CPRA provided subject matter expertise to assess the optimal simulation methodology for each of the different trade populations and to liaise with counterparty credit risk management to ensure regulatory requirements were met.

      Data optimisation workstream: whose primary focus was to address data flow issues which prevented the EPE calculation engines from processing trades . A detailed mapping of the data architecture was created to understand the understand existing flows from multiple cross-business systems into the EPE calculation engine. This was followed by a system migrations phase to optimise data flows to maximise the number of trades processed for EPE.

    Result

    The project delivered significant (multi EUR billion) counterparty credit risk RWA savings for the client.

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    Single Source Market Risk System

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    Single Source Market Risk System

    Challenge

    A top European investment bank had inconsistent reporting between risk and front office due to number of factors including: market data sources; methodology, system processes and hierarchies. A unified and common risk reporting was required by senior management across functions.

    Solution

    • CPRA’s initial engagement focused on rates assets and determined:
      – Existing front office risk information process and rationale
      – Front office requirements for the new source for official market risk information
      – A significant surplus of reports that were not required and
      – The migration path for each area of the business.
    • CPRA was selected to support this project due to its extensive front office risk and structuring experience and its understanding of both front office and market risk departments’ environments.
    • Deliverables included:
      – A detailed mapping of the current universe of risk information and reporting produced within front office
      – A matrix description of the current and desired business user requirements.
      – A comparison between the middle and front office reporting matrices.

    Result

    Our client subsequently requested CPRA to design an appropriate risk dashboard that would meet the Business User Requirements of both front office and market risk.

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    Practical project management with product expertise

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    Practical project management with product expertise

    Challenge

    A blue chip investment bank needed support for Comprehensive Risk Measure, a new, mandatory FSA capital requirement for the correlation book. A new project manager was also required to introduce more project discipline to the development of methodology and implementation across a multi function project team. The client required a specialist, front office skill set as the methodology was complex, involved exotic assets; and to enable effective communication with the trading desk.

    Solution

    • Correlation assets, mainly synthetic CDOs, are some of the most complex products in fixed income and requires a specialist skill set to understand them: CPRA provided a manager with over 5 years experience in CDOs.
    • The project also involved front office quantitative research; model validation and IT, creating a complex and large team: CPRA was able to provide practical project management combined with product knowledge to allow the correct focus on job priorities, effectively communicate methodology requirements to non- quantitative teams and develop the correct documentation to broaden the understanding of the developed methodology.

    Result

    Within a highly pressurised environment CPRA was able to facilitate improved team communication and instill project management that was acceptable to the diverse teams within the project.

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    Private Equity Portfolio Analysis

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    Private Equity Portfolio Analysis

    Challenge

    A private equity client required working capital funding for a portfolio of companies. The client specialised in near-distressed or recovering assets which meant that OpCo financing capacity was limited. In-depth, uniform and aggregated financial information from the portfolio companies was also not readily available.

    Solution

    • CPRA undertook credit analysis of the client portfolio and developed a consistent cashflow model for all the companies to generate an aggregated financial model and therefore view of the potential debt capacity at the portfolio level.
    • Working with Calimere Point Advisors, this credit work formed the foundation to the marketable fund raising capacity and structure for the client.
    • A credit information memorandum and presentation was also developed by CPRA which was signed off by the client and used as part of the marketing process

    Result

    This work enabled the client to successfully raise funding for its cashflow needs during a highly uncertain market period.

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