Dresdner Builds Up Its North American Risk Operations

NEW YORK--Dresdner Kleinwort Benson North America, the New York-based investment banking subsidiary of Dresdner Bank, has completed the first phase of a project to build up its risk management operations and technology infrastructure. Michael Metz, Dresdner NA's director of risk management, is supervising the restructuring of the bank's market, liquidity and credit risk management processes, while Rahul Merchant is heading up the technology and operations revamp.

The first phase of Dresdner NA's risk management project involved building an infrastructure for market risk measurement, says Metz. The bank now collates position data from 11 vendor-supplied trading systems and uses this to compute its daily VAR. Dresdner NA uses a proprietary VAR methodology developed in Frankfurt, he adds, based on a one-day holding period and a 95 per cent confidence level.

Metz's group performs additional market risk analysis on Dresdner NA's trading books, including volatility/ correlation analysis, stress testing and backtesting. The group is also responsible for calculating capital adequacy and monitoring trader limits and capital allocation. These results are passed on to Frankfurt, where Dresdner Bank's global VAR and limits figures are consolidated and reported to the bank's board of directors.

The bank's proprietary market risk management methodology incorporates factors that measure liquidity risk, says Metz. This involves assigning a "liquidity premium" to different markets when calculating VAR, he adds, though he declines to provide further details.

Dresdner's Frankfurt global risk control group monitors credit exposure, but it has given Dresdner NA a mandate to build an independent support for credit risk management. Metz's team is now developing its credit risk management systems, he says, adding that the credit methodology will be integrated with the Monte Carlo simulations used in the bank's market risk calculations. A separate joint project with Frankfurt's risk group is working on additional credit risk techniques, he adds, such as counterparty limit calculations.

Flexible technology

Metz cites technological flexibility as the key to smooth risk operations. Dresdner NA's risk systems are based on a data warehouse that collates information from front office, back office and market data distribution systems. The bank uses a proprietary middleware messaging layer written in Visual Basic and C++.

All Dresdner NA's risk calculations are performed on an internally developed risk engine dubbed RiskMart. This engine was jointly developed by Dresdner NA's risk management group and its IT group. The initial version of RiskMart went live some four months ago, says Metz, though the engine continues to be enhanced.

Dresdner NA is now working on building a Java-based risk reporting tool for RiskMart. This should be available within the next six months, says Metz. Market risk reports will be distributed across the bank's intranet to local regional heads.

Operations overhaul

The bank's risk management drive has been underway for some time now, but its technology and operations overhaul started more recently. Dresdner NA hired Merchant, former head of IT at Sanwa Financial Products, last February to head up its infrastructure development effort (RMO, February 23).

Merchant says he is currently evaluating and planning Dresdner NA's new systems architecture. He says his first step is to determine a common platform that can be rolled out across the bank's four business lines -- capital markets, equities, corporate finance and banking.

Dresdner already runs a global book for forex products, but Merchant says he is examining other business areas to pinpoint opportunities for global consolidation in operations. On the technological front, Merchant says he hopes to develop a simple in-house platform for front-end data integration.

Merchant adds that he is seeking to "accomplish economies of scale, not spend thousands of dollars on new systems, when what we have works well". He says he intends to leverage Dresdner NA's existing systems and "fine-tune the platforms to fit local needs".

Global plans

The initial focus for Dresdner NA's restructuring is on its North American technology and operations, says Merchant. Once this has been completed, the focus will turn to developing a global solution.

Metz and Merchant both report locally to George Fugelsang, chief executive of Dresdner NA. In turn, Fugelsang reports to two Dresdner Bank board members, Ernst Moritz-Lipp and Gerhard Eberstadt. Globally, Metz reports to Hermann Gross, head of global risk management, and Andreas Bezold, the chief financial officer, both based at the bank's Frankfurt headquarters.

Merchant's global reporting line has not yet been established, though a bank spokesperson says he is co-ordinating with Al-Noor Ramji, head of IT for Dresdner Kleinwort Benson in London.

The spokesperson adds that the bank hasn't yet named a replacement for Chris Buchanan, its former head of global IT who resigned earlier this month. Buchanan joined Dresdner earlier this year from Commerz Financial Products.

-- Adriana Saraceni