Paribas First To Take Algo's New Ops Risk Module

LONDON--Banque Paribas is in the middle of piloting an operational risk module from Toronto-based Algorithmics designed to measure and manage settlement risk associated with its London-based fixed income and equity trading groups. Financial institutions have been prompted by regulators to understand their exposures to trades that fail due to processing errors or counterparty defaults.

The first phase of the ops risk module pilot, which has been running for about three months, is close to finishing at the bank. The second phase will involve rolling out the module to operations managers in the London office in July. At present, sources say the pilot of the operational risk module has been limited to the bank's cash bonds business that are handled and settled in London.

Once the module is in the hands of the bank's operations managers, the staff will review and evaluate the system. Paribas hopes to begin a full rollout of the ops risk module to its fixed income and equity operations by the end of this summer, say sources. Eventually, Paribas plans to extend the use of the Algorithmics module to support its operations globally.

Sources say the bank hopes that by installing an operational risk system that can quickly identify processing errors in a trade lifecycle, then the bank can improve operational efficiency and achieve cost reductions.

The working name of the new module is currently OpsWatch and is set to be released by the end of the year, says Jack King, director of Algorithmics' operational risk division. The vendor plans to market the operational risk module as part of its RiskWatch enterprise-wide risk management system.

Comprehensive Support

Algo's module will rely on an underlying casual model that will be used to model unique business dependencies within a bank, says King. The models will support measurement of losses that occur in everything from settlement, reconciliation, compliance, valuations to systems, says King.

Paribas is now taking trade data from the bonds settlement systems. The data provides a status for each trade, within its processing lifecycle, which is then applied to the Algorithmics' operational risk models.

The attributes of individual deals can then be compiled and set against a reference of past losses. With this information, risk managers can identify which trades have an increased probability of carrying greater risk for Paribas.

The ops risk module will also allow the bank to monitor and manage where operational risks occur within its own trade processing lifecycle, adds an official from Paribas.

The attributes of individual deals can then be compiled and set against a reference of past losses. With this information, risk managers can identify which trades have an increased probability of carrying greater risk for Paribas.

Pilot Underway

Paribas is currently conducting the pilot of the operational risk module by imputing data from a daily batch feed, say sources. In the future, Paribas hopes to move to evaluating data on a real-time basis, add the sources.

King joined Algorithmics about a year ago when the Toronto-based vendor acquired the staff and products of his Genoa UK consultancy house. Since then, King has been integrating his operational risk modelling methodology into Algorithmics' RiskWatch system.

King has a long history in working with market and credit risk management. He has worked with a number of German banks in the risk departments and was director of PriceWaterhouse Coopers New York financial consulting practice prior to founding Genoa.

However, King's introduction to operational risk began while working with the International Atomic Agency in the US around the time of the Gulf War. At the agency, King built models to handle nuclear proliferation and the risks involved with tracking high risk materials such as plutonium and uranium at nuclear power plants.

--Elizabeth Lumley