How JP Morgan Uses Reuters' Sailfish For Risk Analysis

JP Morgan's corporate risk management group has installed Reuters' Sailfish risk management system at its New York City corporate headquarters.

The group views Sailfish as one of a set of dedicated market risk analysis software tools used to assess the nature of the bank's overall risk exposure.

The 35-strong corporate risk team works with JP Morgan's global business unit managers to design and implement custom VAR-based market risk methodologies that address the specific requirements of their respective product lines and markets.

JP Morgan's risk management group views Sailfish as "one of several tools we use to solve risk problems," says David Roscoe, a member of the corporate risk team working on risk management strategy design.

The bank has developed a proprietary risk management system to generate a standard daily set of VAR analyses. These routine reports are supplemented with more detailed ad hoc analytics, he says. Sailfish is one of the applications used to generate the additional reports.

JP Morgan's risk group is assembling a set of risk management software tools to address a variety of risk analysis problems covering portfolios of varying depth and complexity, according to Roscoe.

"We aren't necessarily looking to have the answer to everything in a single package," explains Roscoe. "Our standard VAR reporting is augmented with more fine-tuned risk analyses, either for the firm as a whole or for a specific group of positions."

Roscoe cites Sailfish's ability to support several alternative VAR methodologies and its open architecture as the system's major selling points.

Its ability to incorporate external valuation and analytic models within its framework is also a valued feature, he adds.

"Sailfish is a good chassis for performing broadly defined risk management simulations and scenario analyses," says Roscoe.

In addition to a standard variance/covariance VAR calculations, Sailfish also includes a modified parametric methodology that uses Garch techniques to account for unstable variance/covariance matrices and non-normal distributions.

"This is particularly useful in managing emerging market risks, where volatility itself is a stochastic variable," says Gabriel Bousbib, head of Reuters Americas' risk management unit.

Sailfish's developers are also working on adding a scenario building module to the system that constrains scenarios according to arbitrage relationships between multi-currency yield curves, adds Bousbib.

Roscoe says JP Morgan's architecture is being developed to supply risk management applications with the data it requires from lower level trading and deal capture systems.

JP Morgan uses an internally developed cross-markets and cross-products deal capture system in collecting the majority of its trading-related transaction data. Sailfish's applications are currently being fed data via this channel - but this could change.

"We're trying to engineer enough flexibility in our architecture to either feed Sailfish through that conduit or to develop conduits to areas not covered by our main deal capture system," says Roscoe.

"Our production deal capture system may not have the deepest granularity or precision of risk estimate. There's always a trade off between precision and coverage," he adds.

The JP Morgan risk group's strategy is defined in terms of its ability to create risk transparency, Roscoe says. From this perspective, the group addresses risk management from the bottom up.

As new needs arise or new techniques are developed, the team looks to see where and how they can best be implemented.

"We're not risk police. It's more a matter of creating transparency around risk," says Roscoe.

While its primary base of operations is in New York, the corporate risk group is represented in other geographic regions as well.

"Over time we'd seek to integrate the various systems we've invested in, but there's no master plan for integration. It'll be an organic process," says Roscoe.

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