Dear,
As you probably know, SAP Bank Analyzer does not have yet, the recognition it deserves in the Investment Banking industry.
Ironically, it could be a very powerful element of an Investment Bank IT landscape, particularly in combination with other SAP Banking components.
A very interesting example is the management of Margin Calls.
Margin Calls are a very critical requirement in Investment Banking and Capital Markets trading.
Simplifying, the business scenario is as it follows.
Brokers demand investors collateralize their exposures in order to open a position. For keeping the position opened, the broker will require a specific level of collateralization ratio to be maintained (this is a regulatory requirement in most of the jurisdictions).
During normal operations the fair value of the position and the collateral fluctuate every day (actually, every second). If the fair value of the position or the collateral drops, reducing the collateralization ratio below a determined level (called maintenance requirement), a “margin call” will be triggered, requesting additional guarantees to the investor.
If the investor fails to provide the additional guarantees, the broker will close the position.
The question is; does Bank Analyzer have strong functionalities for covering the "margin call" requirements of an Investment Bank?
If we check the Bank Analyzer menu, we will not find any “margin call” transaction (actually we can find it in SAP-TRM).
On the other hand, if we look at the detailed requirements of a margin call scenario, we’ll see that we can handle it by combining the functionalities of several SAP Banking components, even more efficiently than what best of breed trading products can offer today.
We saw some weeks ago, how Bank Analyzer can make an accurate calculation of Financial Collaterals.
Let’s see how to run an enhanced calculation of the collateralization ratio.
Most of Trading Systems determine the minimum collateralization ratio as a quotient between the collaterals fair value and the exposures at risk.
This is an incomplete model because it does not include the Probability of Default of the counterpart, and it does not seem logical to request the same level of collateralization to a risky and a very reliable investor.
Basel II/Basel III agreements give us the foundation for and enhanced calculation of the Collateralization level, which should estimate the Loss Given Default and Probability of Default of the exposure, which depend on the Rating of the Counterparty (Advanced IRB).
The main advantage of this “enhanced” calculation of the collateralization ratio is efficient Capital Management; remember that Collateral is a form of Capital.
Once again, we’re in the middle of a Systemic Crisis which is transforming the Financial System from a business model based in Volume to a business model based in Efficient Capital Management.
Bank Analyzer-Credit Risk Analyzer supports the calculation of LGD and PD parameters according to the Advanced IRB approach, which is the foundation for the enhanced calculation of the collateralization ratio.
Once we’ve calculated the LGD and PD with Bank Analyzer-CRA, determining the enhanced collateralization ratio, and triggering margin call alerts are just reporting requirements, is supported by the reporting functionalities of Netweaver.
I’m aware that the enhanced calculation of the collateralization ratio with Bank Analyzer-CRA presents some performance challenges for big portfolios in very dynamic trading markets, but this is the added value of including SAP-HANA into the landscape.
At the end, we’re talking about Efficient Capital Management, the driver of the new Financial System.
Looking forward to read your opinions.
K. Regards.
Ferran.
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