Financial Derivatives and Risk Management

Paul Rowady was next up at the plate, and he enthusiastically welcomed everyone to the data visualization era. When asked by an audience member, “What exactly is data visualization?, ” he described it as converting data into pictures or visual metaphors so market participants could absorb data more easily. The other panelists all agreed upon the importance of data visualization, given the need to interpret the vast and ever-increasing amounts of data volumes that will need to be consumed in the coming years. Mr. Rowady also reiterated the importance of the need for centralized, enterprise-level risk analytics. Like other panelists, he emphasized the need for breaking down the siloed approach to risk management and for enhancing the fluidity of ‘the flow’—from front-to-back office and back-to-front. Not surprisingly, his research also indicated an uptick in risk management investment amongst financial institutions.

The Increasing Cost of Derivatives Operations

Next, Denny Yu of Numerix in his discussion on Advancements in Risk Analytics, highlighted current industry trends—including how regulation and implementation have led to the increasing cost of derivatives operations. He also discussed how central clearing will continue to offer both challenges—and opportunities. Mr. Yu reiterated how with the roles of front and middle offices continually evolving, practitioners must also continue to evolve best practices. He also cited the new trend in which many banks and buyside institutions are beginning to break down the silos to review metrics across the front and middle office for pricing, capital and regulatory measures.

Denny Yu addresses risk management best practices at New York City’s Harvard Club

The Bottom Line: Economic Value Add/True Profit & Loss

Mr. Yu addressed the major analytics changes due to multi-curve pricing, CSA optionality and the widespread use of valuation adjustments—including credit value adjustment (CVA), debit value adjustment (DVA) and funding value adjustment (FVA.) He talked about what’s been on every practitioner’s mind in the OTC business: how all of these adjustments, in addition to additional transaction costs, impact the bottom line—profit and loss.