IBM Case Studies Optimizing Counterparty Risk Capital with Real-Time Simulation-Based Exposure and Limits Management

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	Optimizing Counterparty Risk Capital with Real-Time Simulation-Based Exposure and Limits Management IBM

Optimizing Counterparty Risk Capital with Real-Time Simulation-Based Exposure and Limits Management

IBM

Technology Category	Analytics & Modeling - Digital Twin / Simulation Analytics & Modeling - Real Time Analytics
Applicable Industries	Finance & Insurance Retail
Use Cases	Real-Time Location System (RTLS) Virtual Reality
Challenge	BBVA, a multinational banking group, was facing a challenge in providing its trading desks with real-time, accurate insight into counterparty credit risk (CCR) and checking the limits for each trade. The bank's philosophy is that risk is a fundamental part of every business decision, and it wanted to manage risk more proactively by moving from an ex-post to an ex-ante model. This required the ability to obtain a precise valuation of CCR and other risk measures even before closing deals. However, the sophisticated CCR models that BBVA's risk team had been using could only be run in a batch process at the end of each day. For pre-deal limit checking, traders had to use a simpler “add-on” modeling approach, which did not take some important factors into account. Moreover, this model was only used in some geographies, while in others, there was no pre-deal limit checking at all. Read More
About Customer	BBVA is a multinational banking group headquartered in Spain. It operates in Europe, North, Central and South America, and the Asia-Pacific region. The group employs over 114,000 people, owns assets of EUR 689 billion, and reports annual net income of approximately EUR 7.5 billion. BBVA’s philosophy is that risk is a fundamental part of every business decision, not only at a strategic level, but also on tactical and operational levels. The bank wanted to position risk management in a new way within its organization – managing risk more proactively by moving from an ex-post to an ex-ante model. Read More
Solution	BBVA decided to work with IBM, as it was already using IBM® Algorithmics® software to power its end-of-day batch model for CCR exposure measures. The bank recognized that the real-time credit engine provided by IBM Algorithmics Integrated Market and Credit Risk was an ideal platform for the new solution. Moving to a real-time engine that would support full Monte Carlo simulation rather than a simple add-on approach required close collaboration between BBVA’s risk and IT teams and IBM. The new IT infrastructure needed to be highly available to support trading desks seamlessly throughout the day. From a user’s perspective, the pre-trade limit checking workflow needed to be clear, simple, and intuitive for the risk managers and traders who would interact with it. The solution also ensured that the trading data that is input into both models is consistent, and an automated reporting platform was introduced that generates statistics and trends about daily trading patterns. Read More Log in to view content
Contents

Technology Category

Analytics & Modeling - Digital Twin / Simulation

Analytics & Modeling - Real Time Analytics

Applicable Industries

Finance & Insurance

Retail

Use Cases

Real-Time Location System (RTLS)

Virtual Reality

Challenge

BBVA, a multinational banking group, was facing a challenge in providing its trading desks with real-time, accurate insight into counterparty credit risk (CCR) and checking the limits for each trade. The bank's philosophy is that risk is a fundamental part of every business decision, and it wanted to manage risk more proactively by moving from an ex-post to an ex-ante model. This required the ability to obtain a precise valuation of CCR and other risk measures even before closing deals. However, the sophisticated CCR models that BBVA's risk team had been using could only be run in a batch process at the end of each day. For pre-deal limit checking, traders had to use a simpler “add-on” modeling approach, which did not take some important factors into account. Moreover, this model was only used in some geographies, while in others, there was no pre-deal limit checking at all.

About Customer

BBVA is a multinational banking group headquartered in Spain. It operates in Europe, North, Central and South America, and the Asia-Pacific region. The group employs over 114,000 people, owns assets of EUR 689 billion, and reports annual net income of approximately EUR 7.5 billion. BBVA’s philosophy is that risk is a fundamental part of every business decision, not only at a strategic level, but also on tactical and operational levels. The bank wanted to position risk management in a new way within its organization – managing risk more proactively by moving from an ex-post to an ex-ante model.

Solution

BBVA decided to work with IBM, as it was already using IBM® Algorithmics® software to power its end-of-day batch model for CCR exposure measures. The bank recognized that the real-time credit engine provided by IBM Algorithmics Integrated Market and Credit Risk was an ideal platform for the new solution. Moving to a real-time engine that would support full Monte Carlo simulation rather than a simple add-on approach required close collaboration between BBVA’s risk and IT teams and IBM. The new IT infrastructure needed to be highly available to support trading desks seamlessly throughout the day. From a user’s perspective, the pre-trade limit checking workflow needed to be clear, simple, and intuitive for the risk managers and traders who would interact with it. The solution also ensured that the trading data that is input into both models is consistent, and an automated reporting platform was introduced that generates statistics and trends about daily trading patterns.

Impact #1	The new solution provided by IBM has given BBVA real-time insight into limit breaches, allowing the bank to identify potential problems while a deal is on the table and solve them before the trade hits the books. It also ensures that there is no risk of a trade seeming to be within the limits when the deal is made, and then appearing as a breach in the end-of-day analysis. The solution also ensures that the trading data that is input into both models is consistent, eliminating the possibility of a trade getting temporarily “lost” between the front office and the risk team. The automated reporting platform introduced alongside the solution helps the risk team make better strategic decisions about where to focus its resources and which projects to prioritize.

Impact #1

The new solution provided by IBM has given BBVA real-time insight into limit breaches, allowing the bank to identify potential problems while a deal is on the table and solve them before the trade hits the books. It also ensures that there is no risk of a trade seeming to be within the limits when the deal is made, and then appearing as a breach in the end-of-day analysis. The solution also ensures that the trading data that is input into both models is consistent, eliminating the possibility of a trade getting temporarily “lost” between the front office and the risk team. The automated reporting platform introduced alongside the solution helps the risk team make better strategic decisions about where to focus its resources and which projects to prioritize.

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Overview

Optimizing Counterparty Risk Capital with Real-Time Simulation-Based Exposure and Limits Management

Operational Impact