Dear SAP Banking community members,
In addition to what we already commented, we must also consider that derivatives have also another difficulty to be managed, they represent a debt which is normally triggered depending on an external economic event (like for example the value of the underline).
Their own nature makes them good candidates for “hiding” debt http://www.nytimes.com/2010/02/14/business/global/14debt.html and consequently makes more difficult to manage and control solvency by the regulation authorities.
In fact, authorities are very aware about the systemic risk that derivatives market represent, and new regulation will look at them very carefully http://www.businessweek.com/magazine/content/10_20/b4178042080510.htm
But regulation alone will not be enough, regulation needs to be fulfilled and the difficulty of solvency management related to derivatives remains there.
Additionally the current information systems don’t look at the derivatives contracts in an integrated way, and that makes the problem more difficult to solve.
For instance, let’s look at an interest rate swap bought for covering the risk related to interest rates rise. Initially we could think that we’ve covered the market risk by paying a premium (the price of the derivative), but the reality is a little bit more complex.
In fact by buying the swap we’ve limited the market risk by paying a premium, but we’re also accepting a new risk exposure to the credit risk of the swap seller, as its capacity of fulfilling its obligations depends on his solvency situation.
So the whole equation is a transfer between profit (paying the premium and reduce potential losses due to interest rate rise), market risk (we’re transferring the market risk to the swap seller), credit risk (the derivative is an asset for us and we’re accepting the credit risk of the counterpart on the contract) and liquidity (hedging the interest rate risk has an impact in potential liabilities).
Only Information systems capable to manage derivatives in an integrated way, including credit risk, market risk, profit and liquidity in an integrated way can guarantee that regulation is fulfilled and past mistakes are avoided.
That’s one of the main advantages of SAP Bank Analyzer, the Integrated Financial and Risk Architecture of Bank Analyzer lets the management of all the dimensions in an integrated way.
What do you think?
Kindest Regards.
Ferran.
In addition to what we already commented, we must also consider that derivatives have also another difficulty to be managed, they represent a debt which is normally triggered depending on an external economic event (like for example the value of the underline).
Their own nature makes them good candidates for “hiding” debt http://www.nytimes.com/2010/02/14/business/global/14debt.html and consequently makes more difficult to manage and control solvency by the regulation authorities.
In fact, authorities are very aware about the systemic risk that derivatives market represent, and new regulation will look at them very carefully http://www.businessweek.com/magazine/content/10_20/b4178042080510.htm
But regulation alone will not be enough, regulation needs to be fulfilled and the difficulty of solvency management related to derivatives remains there.
Additionally the current information systems don’t look at the derivatives contracts in an integrated way, and that makes the problem more difficult to solve.
For instance, let’s look at an interest rate swap bought for covering the risk related to interest rates rise. Initially we could think that we’ve covered the market risk by paying a premium (the price of the derivative), but the reality is a little bit more complex.
In fact by buying the swap we’ve limited the market risk by paying a premium, but we’re also accepting a new risk exposure to the credit risk of the swap seller, as its capacity of fulfilling its obligations depends on his solvency situation.
So the whole equation is a transfer between profit (paying the premium and reduce potential losses due to interest rate rise), market risk (we’re transferring the market risk to the swap seller), credit risk (the derivative is an asset for us and we’re accepting the credit risk of the counterpart on the contract) and liquidity (hedging the interest rate risk has an impact in potential liabilities).
Only Information systems capable to manage derivatives in an integrated way, including credit risk, market risk, profit and liquidity in an integrated way can guarantee that regulation is fulfilled and past mistakes are avoided.
That’s one of the main advantages of SAP Bank Analyzer, the Integrated Financial and Risk Architecture of Bank Analyzer lets the management of all the dimensions in an integrated way.
What do you think?
Kindest Regards.
Ferran.
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