Monitor & Analyze Enterprise Risk With Visual Business Intelligence Tools

Identifying when specific offices, desks or books have come close to or breached risk limits within large trading firms is a complex task. They must review their risk based on a number of factors. Traditional reports provide the data but interpreting the data is very time-consuming. Visual Business Intelligence tools provide managers with much more efficient ways to evaluate risk across the entire enterprise.

This view shows the entire organization in a single screen. Each book, desk and office is visible, including the limit utilization at every point in the hierarchy. The user can toggle between risk metrics, see problem areas as intense red, hover at any level to see risk measures, and drill down for more detail. Click here to see this image in more detail.

Panopticon’s solution is to use its Visual Business Intelligence tools to provide a highly graphical, interactive view of the same set of data. The primary visualizations used are the Treemap and Barseries, which support both static and time series views, making it easy to compare risk levels between offices, desks, sectors, industries, and so on. These visualizations make use of the innate capabilities of the human perception system, so that managers will identify problems quickly. For example, a manager can quickly discover desks where a poor performing book is canceling out a well performing book.

Drill into a particular desk and see the current positions down to the individual instruments. Different hierarchies can be applied to confirm correlations across sector, book, trader, etc. Different risk metrics can be associated with color, and the ranges can be configured to match internal monitoring procedures. Click here to see this image in more detail.

View Risk Exposures Across the Entire Enterprise

Trading firms must be able to monitor and analyze risk across their entire enterprise, including all of their regions, offices, desks, and books. In addition, they must be able to look at risk levels based on sectors and industries, as well as by specific instruments that may be held in a number of books. This level of complexity is not well suited to numerical reports, since the specific set of information that a manager needs to see will be determined by the issues of interest at any particular time. What is needed is a much more flexible method that allows the manager to quickly build a view that is well suited to the problems at hand. They must be able to see risk levels for all levels in the hierarchy on a single screen, and they must be able to manipulate the display so that they can spot issues that require further investigation.

The primary tool for accomplishing this is the Panopticon Treemap. This very powerful visualization makes it easy for managers to look at risk at any level in their entire organization. They can drill down for details on demand, aggregate the data as needed, and filter out less valuable data so that they can better concentrate on the most relevant information. The Treemap makes all this possible on a single screen.

Viewing the enterprise’s exposure to debt ratings highlights problem areas, such as Paris Desk 3 in this example. It has breached multiple risk limits. You can also see how risk aggregates up the enterprise, as shown by the Paris exposure above to ‘BB’. Click here to see this image in more detail.

The Right Tool Makes It Easy to Analyze Risk within Complex Hierarchical Structures

Firms often use the following metrics to gauge risk:

• Risk Exposure, including Value, Limit, and Limit Utilization
• 1 Day Value at Risk (VaR) — used primarily to manage in day to day market risk
• 10 Day Value at Risk (VaR) — used primarily in calculating capital adequacy based on Basel 2 requirements
• Limits and Limit Utilization for the 1 day and 10 day VaR

It’s important to note that for Value at Risk, VaR(a) + VaR(b) is not equal to VaR(a+b). This is due to correlations between instruments reducing the risk of groups of instruments. These correlations are determined through a covariance matrix, which is why it is so important to see all the levels in the hierarchy at the same time.

This view shows the exposure of each office across type structures: Debt Rating and Industry in a single screen. The distribution of exposure across industries is shown trellised into separated debt ratings. Overall exposure and limit utilization can be viewed by selecting a common height scale, or alternatively correlations between offices can easily be determined. Click here to see this image in more detail.

A typical business structure might include the following levels:

• Enterprise
• Region
• Country
• Office
• Desk
• Book
• Trader
• Instrument

The firm will generally define risk limits for each level in the hierarchy down to the Book level. The company may also define additional separate risk limits are defined for instruments in a particular sector or industry, and/or instruments with a specific debt rating. This is a relatively simple example, since firms may also impose additional limits on different groupings. For example, there could be risk limits set by country, investment style, asset class, and so on.

The combination of visualization techniques, filtering capability, and OLAP analysis supported by the Panopticon Visual Business Intelligence system makes it possible for managers to identify problems, see outliers and find correlations — based on current information as well as over time. There is simply no comparison with numerical reports in terms of efficiency and ease of use.