Adequacy of Investments

Tool in support of adequacy to regulatory requirements for Investment consultants and Brokers.

Regulatory bodies recommend to identify for each customer the sustainable risk level and to periodically verify adequacy of the customer portfolio composition to the agreed risk propensity. The level of sophistication of such controls and their frequency determine the level of service accuracy that the Investment company is able to offer to customers.

1. Compliance Server

Tool built by merging the questionnaire utilized to identify customer risk profile with risk management algorithms, in order to evaluate portfolios composed by a large variety of security instruments. Our module allows to interact with core banking system, without any limitation on operations. Since it assures very high performance, it can execute real-time controls on orders and trades. We also have available calculation engines for batch analysis of all customer portfolios. The module is compliant with all controls required by MiFID regulations, from European Central Bank

2. Questionnaire to identify customer risk propensity

Questionnaire module allows to profile customer through usage of a Wizard composed by a configurable set of questions & answers. Questionnaire is a typical tool to evaluate customer risk level. It can identify a risk propensity level by induction, via assignment of a predefined score to each answer. The final result of questionnaire can be an “acceptable risk level” or a “set of benchmark portfolios” (all having similar risk level). During set-up and configuration phase, our consultants can offer customization services for the composition of the questionnaire: questions, answers, scores and weights, number of profiles or benchmark (model) portfolios.

3. Risk calculation engine

Our risk calculation engine allow to evaluate, in real-time, overall risk level of any customer portfolio. To obtain the most accurate calculation, system is usually updated every day, with detailed portfolio positions from all Investment Company operational systems. Risk level is calculated in terms of portfolio volatility and VaR (Value at Risk).

Risk calculation engine can be utilized by on-line calls for real-time monitoring or batch evaluation of the entire set of portfolios, both for the verification of the adequacy of the individual transaction, or the adequacy of the entire portfolio position.

Our calculation model has been implemented in conjunction with primary consultancy firms and has been certified by several Investment Companies and Banks. It guarantees total coverage of any listed financial instrument, thanks to price feed integration with all leading Information Providers. Our calculation model includes variance & covariance matrixes and allows to store for each individual instrument:

    • duration
    • rating
    • industry sector
    • asset class
    • currency

These indicators are utilized to calculate VaR and can be also used (in accordance with selected Information Provider) in the module for financial advisors (Financial Planning).

Our models also insures coverage of any captive (internally created) financial instrument (cash deposits, certificates, managed portfolio, index or equity linked bonds or insurance policies), as long as the Investment Company takes care to provide similar indicators.

We can offer service to support new bond issuing by Investment Company: based on the official informational prospectus, plus other information delivered by Company, our consultants propose optimized de-composition model into appropriate asset classes and prime elements, that constitute building blocks of full risk evaluation.

At last, our consultants can extend standard variance / covariance matrix, with additional risk factors, in order to enhance calculation engine accuracy. It is possible to extend the matrix without any restriction, as it is also possible to reduce it, by merging individual risk factors into more generic ones.

To enhance performance, out VaR engine can produce a “marginal VaR” (contribution of an individual security to the total portfolio VaR).

4. Additional controls

Optionally, risk engine can operate additional controls, necessary to fulfill the full spectrum of verifications required by the regulatory bodies:

  • frequency of transactions;
  • quality and quantity of exposure to individual issuers;
  • complexity of the structured products.

5. Adequacy service

Using all the components described in this section, this service allows the Investment Company to verify under all perspectives required by regulators the adequacy of an individual trade, or a basket of trades aimed at rebalancing an entire portfolio. This service must be called by the operational systems, before executing a trade.

In similar manner, this service can be used in “what-if” analysis scenario, to validate the appropriateness of a commercial strategy. The service will receive “as input” a set of  transactions to be executed upon a customer portfolio,  and provides as output:

  • warning messages with explanations on WHY customer portfolio becomes “non compliant”
  • informational messages with explanations on new indicators for portfolio compliancy (new volatility, new VaR, etc), should the transactions be confirmed.

Each end-of-day, system needs to be totally realigned with customer portfolio positions as re-calculated by operational systems.

6. Integration with Information Providers

At each end-of-day, our risk engine is expecting to receive a flow with historical and daily prices and basic indicators (coupon rates, etc.), to be used to pre-calculate matrices of risk indicators for all financial instruments.