Market Risk Analyzer 

Purpose

The Market Risk Analyzer (TRM-MR) component of SAP Treasury and Risk Management offers corporations and insurance companies a range of functions for managing risks on a global basis.

Of all the different external risks to which companies operating internationally are exposed, it is changes in market prices that are the most critical factors for company success. They can have a profound effect on the amount, present value, or timing of payment flows. Operative business and Treasury transactions alike are affected by market risks. In order to measure and manage risks fully, it is essential to bring together all risk-related company activities.

In recent years, no other area has come close to developing such an extensive toolset for measuring risk as market risk management. Since it is comparatively easy to obtain up-to-date market data and historical market data, it is possible to quantify risk volume accurately. This data provides an ideal basis for risk management.

The methods used in modern risk management systems enables companies to perform detailed  analyses of their positions with regard to all the factors that affect prices. What is more, the decision-support aspect of risk management is gaining importance to ensure the successful implementation of company strategies. Simulating future portfolio structures and incorporating potential market trends in the analyses is becoming a key part of preventative financial management.

At the same time, risk management is no longer merely an instrument of control after the event, but one capable of adding value to a company. The development of new financial instruments and improvements in investor relations and the company's reputation on the capital market are just some of the benefits of proven risk reduction. The company organization is also feeling the effects of this change since risk controlling now reports directly to the board.

In addition, companies have to consider a growing number of legal regulations that require risk management systems to be established within the enterprise. Some of these regulations apply only to specific industries, whilst others apply to all industries. The legislators have protected the interests of the investors by acknowledging the vast increase in the scope of risk that has gone hand in hand with market globalization.

Market Risk Analyzer has been designed to cater for the requirements of all industry sectors. It reflects the requirements of the methods used in the financial services sector to measure risk, and makes it possible to include the payment flows from companies’ business activities in risk analysis. You can use company-specific portfolio hierarchies to analyze risks according to the factors that give rise to these risks (exchange rates, interest rates, prices, volatilities). Market Risk Analyzer contains analyses that look at data at given point in time, such as mark-to-market valuations, as well as dynamic evaluations, such as position trend analysis or profit and loss simulations. It also contains functions for identifying open risk positions that affect your interest rate or currency exposure, alongside classical risk control instruments, such as value-at-risk methods.

In the integrated SAP environment, you have all the information you need for risk management at your fingertips. To evaluate alternative hedging strategies, you can enter simulated transactions and market data scenarios and see the combined effect of the simulated data and your real transactions. In this way, Market Risk Analyzer fully supports your trading activities.

Market Risk Analyzer - Concept

Data collection

For informed risk management, it is essential to capture all risk-related activities. Market risks influence all the payment flows in a company irrespective of where they originate. The integrated system environment ensures that once all the necessary information has been entered, it can be accessed automatically. This is equally true for operative activities within the logistical chain and for transactions that have been entered in Transaction Manager. The SAP system can minimize the number of interfaces that have to be defined and maintained between different systems. This is usually a major cost consideration when implementing risk management systems.

The link between Market Risk Analyzer and real-time datafeed also provides access to current market data that can be used to analyze risk positions. The imported data is stored centrally and is available across the entire system, thus ensuring that all evaluations are based on consistent data.

Mark-to-market valuation and position analysis

The main task of risk management is to identify potential losses on the basis of current market data. Market Risk Analyzer provides you with a comprehensive system for calculating the net present value of common financial instruments. The calculated values (net present values or clean prices) can be stored and used later for accounting purposes by the valuation functions in Transaction Manager. This also complies with the requirements of FAS 133. The calculation steps carried out are recorded clearly and comprehensibly in a log together with the market data upon which they were based. In addition, extensive documentation on the financial mathematical models used is available.

To handle the risk profiles of complex financial instruments, a data model has been developed using the concept of a generic transaction and an internal risk object. By linking multiple elementary components, it can map flexible transaction structures. The system offers you an architecture that can adapt to future demands. It integrates risks in the valuation methods of Market Risk Analyzer, independently of the underlying business processes.

Sensitivity analyses and simulations

Net present values are used to measure the sensitivity of portfolios to changes in market data and to highlight potential changes. You can map classic sensitivity key figures, such as basis point values, durations, convexities, and the Greeks in Market Risk Analyzer as well as differentiated simulation scenarios. These scenarios contain any combination of market data values and can be integrated into all Market Risk Analyzer evaluations. You can even map a series of scenarios in chronological order in the system as scenario progressions. Using different simulation procedures, you can reflect market fluctuations in your current market data dynamically, or keep the data constant and use it in extreme value scenarios (stress tests) over any time periods.

Besides changes market data, changes in the structure of the bank's portfolio also play a vital role in new business planning. For this aspect, Market Risk Analyzer provides a series of evaluations, based on individual or standardized planning requirements, which enable you to generate simulated transactions and analyze their impact on the liquidity of your company, the business structure, and the profit and loss.

Currency exposure

For many companies that are actively involved in global markets, analyzing and hedging foreign currency risks is an essential element of market risk management. To capitalize on economies of scale and set up hedging activities for aggregated foreign currency payments across the group, central treasury departments frequently turn currency management to their advantage. This restricts local activities to transactions that are required for processing incoming or outgoing payments or those that observe the statutory regulations. This type of structure places high demands on the system landscape to include all the relevant liquidity flows in the foreign currency planning. The SAP Cash Management module undertakes the necessary preparatory tasks for this; it prepares a formatted data basis by bringing together local payment activities in a distributed system landscape. Market Risk Analyzer can access this information directly, without needing its own interface. The financial transactions entered in Transaction Manager are then compared with the operative payments. For flexible maturity bands, the currency exposure then calculates the remaining open items for each currency, which can be used for further hedging activities. You can use drilldown reporting to call up detailed information for individual items at any time.

Liquidity analysis

Ensuring liquidity is a fundamental condition for revenue-oriented and risk-oriented enterprise management. In this area too, companies today require a system that does much more than simply combine actual payment information. Only when your liquidity planning is integrated and market data changes simulated do you have a solid base of information for analyzing your liquidity. By incorporating scenarios or scenario progressions, Market Risk Analyzer allows you to analyze the impact of market fluctuations on the liquidity of your company (for example the amount of variable or optional cash flows), and use simulated financial transactions to smooth out identified liquidity surpluses or deficits.

Value at risk

Value-at-risk analysis is an extension of net present value analysis and uses a standard measure for risk. It uses historical or simulated market data to calculate the value loss of a position which, based on a certain probability, within a certain period, could be incurred before the position is hedged or sold.

Due to its uniform net present value approach, value-at-risk analysis has taken off as a risk-controlling instrument. The increased popularity of this procedure has been helped to a large extent by the vast improvement in the availability of (historical) market data in recent years. Market Risk Analyzer supports the models that are currently commonly used on the market.

Value-at-risk method in Market Risk Analyzer

It is also possible to use a combination of methods depending on the instrument that is to be priced. You can import external data for the calculations or use the market data stored in the SAP tables. A statistics calculator enables you to estimate volatilities and correlations for the variance/covariance approach.

You can structure the risk factors you want to use to calculate and display the value at risk in risk hierarchies that you can configure yourself. You can also use risk hierarchies to determine the aggregation procedures and levels.

Flexible portfolio hierarchies

To counteract risks efficiently, it is absolutely necessary to clearly quantify the risk contribution of individual risk factors (such as interest, currencies), risk objects (such as financial transactions), or organization entities (for example, profit center). It must therefore be possible for you to perform risk analyses according to the most varied criteria and at different aggregation levels. If, for example, you want to have a value-at-risk key figure just as summarized information at company-wide level, you still have to specify the risk amounts in detail for each of the relevant underlying factors to comply with hedge accounting requirements.

For questions such as these, Market Risk Analyzer takes advantage of flexibly definable portfolio hierarchies, which are used not only to determine the characteristics by which risks are separated, but also to specify the hierarchy levels at which the individual risks are aggregated. The portfolio structure is based on the characteristics of the risk objects (financial transactions, operative cash flows), which are stored in the system in an internal data pool. Each of these characteristics (for example, trader, transaction currency, type of financial instrument, exchange) can be used to create the portfolio hierarchy. If some of the characteristics are assigned to a portfolio hierarchy node, all objects that have these characteristics are automatically displayed under the corresponding node. Since it is possible to create any number of portfolio hierarchies on the basis of the data pool, the different aspects of risk reporting (organizational and instrument-specific) are covered at all times.

The sheer flexibility in evaluation control and the highly sophisticated tools combine to make Market Risk Analyzer an efficient instrument for controlling risk for companies across all sectors of industry. In addition, Market Risk Analyzer can access to all the information related to risks that is available in the system without needing a special interface to do so. When you map operative activities using the SAP Cash Management module or enter financial transactions in Transaction Manager, you have all the real-time data you need for the Market Risk Analyzer reports. What is more, there is no need to enter anything twice.

You can find the functions of Market Risk Analyzer under Accounting ® Financial Supply Chain Management ® Treasury and Risk Management ® Market Risk Analyzer.

Implementation Considerations

In order to be able to use the Market Risk Analyzer component, you must make the necessary Customizing settings in Customizing under Financial Supply Chain Management ® Treasury and Risk Management ® Basic Analyzer Settings and Market Risk Analyzer.

Menu Paths

Since the functions in TRM Market Risk Analyzer are taken from SAP Banking's Market Risk Analyzer, the documentation in Market Risk Analyzer also applies here. However, this means that the documentation does contain menu paths from SAP Banking. This will be adjusted for TRM users at a future point in time.