Regulatory calculations are becoming increasingly complex, especially where over-the-counter derivatives portfolios are concerned.
The various value adjustments required by International Financial Reporting Standard 13 and Basel III and the calculations inherent in the forthcoming Fundamental Review of the Trading Book are just some of the areas that present computational demands beyond the existing IT capabilities of many institutions in the region. How to solve the problem without taking on costly complicated systems infrastructure is exercising the minds of many risk managers.
Sydney-based Vector Risk prepared for that scenario. In 2013, the company knew it had the high-performance analytical capabilities to tackle the regulatory demands, but needed a more efficient and cost-effective way of getting its software to users than conventional on-premises installation. Public cloud services were emerging as an alternative software delivery option, and while the financial sector’s general response was cautious, Vector Risk decided to take the plunge.
“We saw the opportunity to put our risk engine in the cloud,” says Justin Taylor, managing director of Vector Risk. “In Asia, a lot of second-tier banks can’t afford to spend millions of dollars on an in-house risk system and also want something quick to install.”
This approach lured clients such as Kiwibank and KPMG, which picked Vector Risk to handle the off-balance-sheet risk metrics for its risk-as-a service offering.
The easy option would have been for the company to ‘cloud-enable’ its engine – making adjustments so it could access the extensive hardware resources of cloud. But that would not have allowed it to take advantage of the key cloud feature of ‘multi-tenancy’ operation.
Under this approach, Vector Risk develops and maintains just one version of its software, with clients accessing individual ‘instances’ of it. This radically reduces support costs all round and allows the company to deliver its software as a service (SaaS) on a subscription – rather than a licence-fee – basis.
The constraint of multi-tenancy is that it does not allow for individual customisation. This puts the onus on the vendor to create a richly featured configurable application, although even this will not suit larger institutions that require a risk system highly tailored to their operations.
“A multi-tenancy SaaS application can provide 80% of functionality at 20% of the cost, which is attractive for many smaller institutions,” says Taylor.
In Asia, a lot of second-tier banks can’t afford to spend millions of dollars on an in-house risk system and also want something quick to installJustin Taylor, Vector Risk
The company chose Microsoft’s Azure cloud platform on which to operate its software, and is working with the company on several projects, including an FRTB demonstrator for its app store. Earlier this year, Microsoft named Vector Risk the winner of its Financial Services Partner of the Year award.
Cloud and SaaS are not enough on their own to win clients in the risk arena – the software also has to compete on performance and functionality. The company had already addressed the performance issue earlier by ‘vectorising’ its risk engine.
Simply put, vectorisation is a way of speeding up calculations by applying programming operations to many values at once, rather than sequentially in a loop. Taylor argues that it is a “lighter-touch” way of achieving high performance in a risk system than approaches such as graphics processing units or centralised calculated ‘data cubes’ favoured by some other risk system providers.
Vector Risk already has a half-dozen clients using its system, with more in the pipeline as well as several interesting partnerships.
Kiwibank was looking for timely and affordable calculation of credit and debit value adjustments for its IFRS 13 reporting. It has been using Vector Risk for two years. Matthew Poulton, head of market risk at Kiwibank, says the system “was extremely quick to implement, and is fast, reliable and easy to maintain”.
When KPMG decided to develop a risk-as-a-service offering for banks, initially based in Singapore and aimed at the Asian market, it chose Vector Risk to handle the off-balance-sheet risk metrics. KPMG was already using Vector Risk to test financial instruments as part of its audit services for major banks, as well as in its consultancy for FRTB. Vector Risk was one of the few platforms optimised for cloud, with sophisticated and powerful analytics, and its multi-tenancy model enables KPMG to easily onboard clients, says Craig Davis, partner, risk consulting at KPMG.
Vector Risk’s powerful FRTB capabilities has also caught the eye of New York-based pricing and risk specialist Numerix, which has incorporated the functionality in its Oneview platform. Vector Risk is also currently working with private investment firm Lone Star Capital to develop an enterprise-scale risk management application for cryptocurrency token and asset portfolios.