EG Consults had a number of clients focused on trading risk management in different areas of a major investment bank. These included Complex Derivatives Trading, Corporate Credit Portfolio and Capital Analysis. This highly quantitative and data intensive work required partnership with:

• traders that owned the risk of the portfolio

• quantitative analysts that developed and calibrated the models used in valuation

• technology and operations teams that managed the supporting risk infrastructure and produced results

EG Consults developed accessible and intuitive analysis of risk and profit leading to agreement on findings, recommendations and next steps.

The Value Proposition

Trading risk management aims to establish a framework for disciplined risk taking. Traders, the actual risk takers, execute specific transactions and manage a focused portfolio of positions. They are directly responsible for profit and loss. There are a number of trading oversight functions, each with a specific focus. For example, a risk manager may be responsible for hedging the risk of several trading desks. At the corporate level, a firm-wide view (across many types of trading desks) is required to manage the risk of the bank as a whole, to allocate capital among competing interests and to ensure that various regulations are followed. EG Consults has worked both directly for risk takers, for trading management and also for corporate functions.

Trading risk management at every level must look forward and also backwards. We look forward to outline possible future portfolio performance under a variety of scenarios and thereby establish our risk tolerance. How much risk are we willing to take for potential returns and how much is too much? We also look backwards to explain realized profits and losses. Was actual portfolio performance anticipated in our analysis and our metrics? What are the lessons learned and how do we do better going forward?

Pulling It All Together

Pulling it all together for a trading risk management story means:

• working in a complex and dynamic data environment, understanding the intricacies of the supporting systems and operational processes

• partnering with subject matter experts including risk takers and the quantitative analysts that develop models

• outlining a narrative that clearly evidences the current state of a portfolio and explains projected risk and past performance

• developing findings through a highly rigorous but flexible approach

On Managing Large Data Sets

Trading risk management depends on the ability to navigate large data sets. At a major bank, there are thousands of positions owned by each trading desk and hundreds of thousands, or even millions, of positions firm-wide. An established glossary of terminology and precise definition of all data elements including metrics, units and timestamps is critical. There are always trade-offs between processing short-cuts such as a sensitivity based approach versus a full valuation approach, which may take hours to generate results. There are always assumptions with implications that must be clearly defined and well understood, particularly under distressed market conditions, when trading risk management matters most. EG Consults exhaustively defined the operating environment and the data flows that are the foundation for analysis.

In many cases, complex models, governed by context specific model parameters, are used. As the environment changes, these models need to be recalibrated and the model parameters reset.

The scope of EG Consults’ work included thinking through risk scenarios that might arise and assess the ability to hedge positions under those scenarios. The goal was to learn from the past but also think creatively to predict the future, under normal and stressed market conditions. Analysis of results framed a number of questions. What can we discern from trends or breaks in trends? Can we clarify what seem to be anomalies or concentrations? Can we isolate the impact of various value drivers, singly and in various combinations? Can we study the past but also think creatively to predict the future? EG Consults has deep experience understanding the drivers of portfolio value, working with large data sets and generating high quality analysis.

EG Consults Work Product

Narratives were presented in an accessible manner, often with graphics and data visualizations to illustrate key concepts. Presentation standards included consistent look and feel of work product, clearly defined and consistently used terminology, specification of all calculations and units and use of illustrative graphics and data visualizations. EG Consults presentation standards promoted management confidence in the quality of the analysis and the underlying data, laying the groundwork for focussed and constructive discussion of risk.