Managing Risk with Composite Information Systems

Managing Risk with Composit Information Systms Ying-Sung Tay May 1990 WP # CIS-90-10

MANAGING RISK WITH COMPOSITE INFORMATION SYSTEMS Ying-Sung Tay May 31, 1990 Rsarch Assistantship Rport ABSTRACT With hug xposurs, potntial corporat-wid damags, and high volatility lik thos in contmporary financial markts, risk managmnt is incrasingly bcoming a major concrn among financial and non-financial firms today. This papr prsnts th cas for th us of composit information systms in managing xposur to risks, spcially in th contxt of financial institutions. Corporations and financial institutions fac a wid varity of risks in thir daily oprations. Th objctiv of risk managmnt is to maintain th firm's xposur to ths risks within accptabl bounds. In this papr, w assum that what constituts "accptability" has bn st by managmnt; w concntrat on what how a firm can manag its xposur by bttr undrstanding information gland by disparat data sourcs. W bgin with an ovrviw of contmporary risk managmnt: what ar th diffrnt kinds of risk and what ar th sourcs of ach kind, how companis organiz thmslvs for risk managmnt, what ar th bnfits of an information systm for risk managmnt, and rquirmnts for such a systm, and th kinds of risk managmnt systms dployd today. I will also brifly dscrib th kinds of multiplsourc information systms currntly in us for risk managmnt, and th trnds in th vndors of ths systms in mrging among thmslvs. Th balanc of this papr xamins th cas of Salomon Brothrs-how it organizs itslf for risk managmnt, th risk managmnt systms in plac, and how Salomon Brothrs might us nw tchniqus in composit information systms to bttr organiz itslf for risk managmnt. KEYWORDS AND PHRASES: risk managmnt, xposur, htrognous databass, intgration, information systms, Salomon Brothrs. ACKNOWLEDGEMENTS: I would lik to thank Profssors Stuart Madnick and Richard Wang for thir support in this work. Many popl at Salomon Brothrs hav contributd to this papr. I thank thm all. Support for this projct was providd in part by th MIT Intrnational Financial Srvics Rsarch Cntr.

TABLE OF CONTENTS 1. AN OVERVIEW OF RISK MANAGEMENT.c...I 1.1 Th Contxt of Risk Managmnt... 2 1.2 Th Many Typs of Risks... 3 1.3 Organizing for Risk Managmnt... 6 1.4 Bnfits of Risk Managmnt Systms... 11 1.5 Tchnological Rquirmnts for a Risk Managmnt Systm... 12 1.6 Risk Managmnt Systms Today... 13 1.7 Multipl-sourc Information Systms Today...14 1.8 Th Ag of Synrgistic Alliancs...15 2. RISK MANAGEMENT AT SALOMON BROTHERS... 16 2.1 Structur of Salomon Brothrs' Organization for Risk Managmnt... 16 2.2 Risk Managmnt Functions and Policis at Salomon Brothrs... 17 2.3 Risk Monitoring Systms at Salomon Brothrs... 17 2.3.1 Th Existing Information Systms at Salomon Brothrs... 18 2.3.1.1 Th Information Systm Environmnt at Salomon Brothrs...19 2.3.1.2 Th vviw from th Top...20 2.3.1.3 Procss of Chang... 21 2.3.1.3.1 Standardization of Cor Data... 23 2.3.1.3.1.1 Objctivs...23 2.3.1.3.1.2 Scop...23 2.3.1.3.1.3 Potntial Problms... 23 2.3.1.3.1.4 Issus Addrssd...24 2.3.1.3.1.4.1 Primary Ky to All Data...24 2.3.1.3.1.4.2 Parnt and Subsidiary Information...24 2.3.1.3.1.5 Opportunitis for CIS Rsarch in th Dsign of th Cor Data Architctur...25 2.3.1.3.2 Crdit Risk Managmnt... 25 2.3.1.3.2.1 Crdit Rviw Systm... 25 2.3.1.3.2.2 Margin/Exposur Systm... 26 2.3.1.3.2.3 Trasury Systm...26 2.3.1.3.3 Risk Managmnt at th Arbitrag Dsk...26 2.3.1.3.3.1 Hdging of Risks... 26 2.3.1.3.3.2 Trading Oprations...27 2.3.1.3.3.3 Accounting of Trads Don... 27 2.4 Risk Managmnt with Composit Information Systms... 27 REFERENCES...28

LIST OF FIGURES Figur 1: Th sourcs of risk... 4 Figur 2: An idal, cntralizd architctur for a risk managmnt systm...8 LIST OF TABLES Tabl 1: Th contxt of risk... 2 Tabl 2: List of Information supplirs and thir markt shars... 3

MANAGING RISK WITH COMPOSITE INFORMATION SYSTEMS In 1987, Mrrill Lynch rportd a $377 million loss in th mortgag-backd scuritis markt. This was primarily du to an ovrsight in risk managmnt. In 1988, First Boston stimatd a pr-tax loss of as much as $50 million in th sam markt. Again, this was du to poor risk managmnt. "In London's Big Bang, nwly mrgd institutions hav found thmslvs th proud possssors of millions of pounds' worth of high tchnology systms which ar uniformly incompatibl. Whn th branch is in a diffrnt tim zon from th on th had offic is in, has a dissimilar risk-managmnt policy, and has fostrd a spirit of local autonomy, communications can dtriorat to th point whr ignoranc rsults in vulnrabl xposurs." 1 In January 1990, intrst rat incrass in Wst Grmany and Japan snt shock wavs through th U.S. stock and bond markts. Bcaus th U.S. Trasury Dpartmnt must borrow to fund its hug dficit, th U.S. has bcom a dbtor nation dpndnt on forign capital. Japans institutions purchas on-third of th U.S. Trasury bond issus, and thr hav bn fars that U.S. intrst rats will hav to incras to attract Japans invstors. With hug xposurs. potntial corporat-wid damags, and high volatility lik th situations dscribd abov, risk managmnt is incrasingly bcoming a major concrn among financial and non-financial firms today. This papr prsnts th cas for th us of composit information systms in managing xposur to risks, spcially in th contxt of financial institutions. Corporations and financial institutions fac a wid varity of risks in thir daily oprations. Th objctiv of risk managmnt is to maintain th firm's xposur to ths risks within accptabl bounds. In this papr, w assum that what constituts "accptability" has bn st by managmnt; w concntrat on what how a firm can manag its xposur by bttr undrstanding information gland by disparat data sourcs. W bgin with an ovrviw of contmporary risk managmnt: what ar th diffrnt kinds of risk and what ar th sourcs of ach kind, how companis organiz thmslvs for risk managmnt, what ar th bnfits of an information systm for risk managmnt, and rquirmnts for such a systm, and th kinds of risk managmnt systms dployd today. I will also brifly dscrib th kinds of multiplsourc information systms currntly in us for risk managmnt, and th trnds in th vndors of ths systms in mrging among thmslvs. Th balanc of this papr xamins th cas of Salomon Brothrs-how it organizs itslf for risk managmnt, th risk managmnt systms in plac, and how Salomon Brothrs might us nw tchniqus in composit information systms to bttr organiz itslf for risk managmnt. 1. AN OVERVIEW OF RISK MANAGEMENT W bgin by xamining th various aspcts of risks facd by today's financial institutions. W thn discuss how companis organiz thmslvs for risk managmnt, how th organization utiliz information systms for risk managmnt, and th major problms facd in risk managmnt. 1 "Kp Risk at Bay in th Global Banking Era," Euromony, January 1987, pg. 70.

1.1 Th Contxt of Risk Managmnt Th typical firm facs many challngs in its managmnt of risks. Ths changs com from many contxts: Sourc comptitiv contxt macro conomy govrnmnt rol financial markts tchnology Charactristics and Exampls globalization, rgionalization, comptitiv parity chaos, turbulnc, imbalancs fiscal policy, industrial policy, protctionism, rollback of scop du to fiscal limitations globalization, volatility, innovation, continud crdit and country risks incrasd pac, opn larning loop, tchnoparity Tabl 1: Th contxt of risk. Th abov charactristics and xampls rprsnt th prils of today's nvironmnt. Yt, this sam nvironmnt offrs much potntial for profits. For instanc, on of th most profitabl aras for bank xpansion is global Capital markt trading. Chas Manhattan had trading rvnus of $233 million in 1987; Citicorp-th numbr on among trading banks-postd $453 million in th sam yar; Bankrs Trust rportd whopping gains of $338 million in th last quartr of 1987 alon. All thr ar havy global tradrs. Th prolifration of information sourcs, howvr, coms with global activity. For xampl, th Association of Intrnational Bond Dalrs (AIBD) has a sttlmnt systm calld ACE (for AIBD, Cdl, and Euroclar) offring nxt-day confirmation, as wll as TRAX, a trad matching and confirm systm that may also carry ral-tim pric information. Th Intrnational Stock Exchang of London is in th middl of svral nw systms dvlopmnts dsignd to radicat confirmation and sttlmnt problms. SEQUAL is its on-lin trad confirmation systm for intrnational quitis. Th London xchang also has a Transfr and Automatd Rgistration of Uncrtificatd Stock (TAURUS) to tak paprwork out of sttlmnt by nabling mmbr firms to hold and transfr scuritis without th nd for shar crtificats. At th Chicago Mrcantil Exchang, th Post Markt Trading (PMT) systm is bing xpandd from currncy and intrst rat futurs contracts to stock xchang and indx futurs. And finally, thr ar th digital fds from Rutrs through its Rich and Triarch products, as wll as Micrognosis, Quotron, Datalogic, Bishopsgat, and othr commrcial information sourcs, all contributing to th prolifration of information sourcs. Th currnt situation is also filld with sundry unintgratd in-hous risk managmnt systms and global ntworking facilitis providd by vndors lik Gnral Elctric Information Srvics and IP Sharp. But ths hav again bn unintgratd, stand-alon srvics which oprat in batch and oftn rquir sparat kying by back-offic staff aftr th trad is closd by front-offic tradrs. Som banks hav ovr fiv trading systms in opration simultanously, crating ovr 10,000 positions pr day. Howvr, most of ths systms ar not intgratd. Any bank with a rang of srvics would nd to link to ths systms. At th sam tim, it must also b abl to know its risk position for diffrnt financial instrumnts at any tim. Not only is this knowldg usful for its risk managmnt, it is rquird by many rgulatory agncis such as th Bank of England (BoE), th Scuritis Association (TSA), th Fdral Rsrv Bank (Fd), th stock xchang, or intrnational bodis lik th AIBD. Financial institutions hav no choic but to comply if thy want to rmain activ. Not only do

thy hav no choic in complianc, thy hav to submit complianc rports frquntly and rgularly. For instanc, th TSA dmands fortnightly position risk rports-countr-party risk rquirmnts (CRR), position risk rquirmnts (PRR), tc. Furthr, thr ar in-hous rporting which audit th trading activitis for control purposs. 1of Information Trminals Sits Avrag Pntration Prcntag Ranking by supplir fi Ipr sit daling of positions positions J LoJ J jrooms (%) Rutrs 5,799 195 30.5 97.5 31.4 1 Tlrat 4,087 142 29.8 71.0 22.1 2 Topic 3,350 49 71.3 24.5 18.2 3 Datastram 1,150 30 42.6 15.0 6.2 4 Knight- 313 23 14.9 11.5 1.7 8 Riddr Bl b 74 13 5.7 6.5 0.4 Futrnd 63 12 5.3 6.0 0.3 Quick 949 11 105.4 5.5 5.1 5 Quotron 928 11 84.4 5.5 5.0 6 Brig/Pit26 10 2.9 5.0 0.1 ADP 17 9 2.1 4.5 0.1 Comtrnd I I I Extl 702 3 234.0 1.5 3.8 7 Tabl 2: List of Information supplirs and thir markt shars 2. Th information rquirmnts for risk managmnt has also changd ovr tim. Traditionally, ntwork oprators lik IP Sharp and GEISCO hav sold spcializd, standalon global-limits systms for th stting and manipulation of xposurs to countrpartis. Th significanc of ths has wand quickly. For on thing, thy only provid information on countrparty xposur. Now that crdit risk has bn monitord, most banks turn thir attntion to managing markt risk-th risks du to intrst rat, currncy, and liquidity fluctuations, whos volatilitis hav incrasd significantly ovr th yars. Thrfor, th sourcs of risk-managmnt systms hav shiftd from crdit managrs to tradrs. Evn thn, companis lik Salomon Brothrs hav accommodatd such shifts by coordinating trading activitis cntrally with a dgr of autonomy in ach gographic ara. Th rational usually givn for such a structur, as opposd to a cntralizd systm, is that it is hard to crat a formalizd systm of limits and positions bcaus th conditions govrning what thy should b can vary vry fast-it is mor a qustion of kping up a continuous dialogu btwn th risk managr and th tradr. 1.2 Th Many Typs of Risks A typical firm facs risks originating from th individual countrpartis thy dal with (.g. supplirs and customrs), th largr conomic nvironmnt (or th markt) in which thy oprat,, th political and rgulatory nvironmnt, th still largr intrnational nvironmnt, and vn intrnally from th firm itslf (plas s Figur 1).3 2 Sourc: "How to Tam th High-Tch Monstr," EUROtc, August 1988, pg. 33. 3 Adaptd from "Managing a risky businss," Banking Tchnology, Novmbr 1989, pp. 25-27. Th articl did not mak th distinction of th intrnational nvironmnt.

Countrpartis ar th sourcs of th following kinds of risks: sttlmnt or claranc: customrs may dlay sttling accounts rcivabls (or vn not sttl such rcivabls if thy go bankrupt) and supplirs may shortn th grac priod for sttling accounts payabl. Intrnal Countrpartis Economic Environmnt (Markt) Intrnational Environmnt Political & Rgulatory Environmnt Figur 1: Th sourcs of risk. crdit: th crdit ratings of customrs and companis vary according to thir financial prformanc ovr tim. Th changing crdit worthinss would affct th crdit lins xtndd to th customr, thir quity ratings and thir corporat dbts' ratings. - mrgrs, and acquisitions: som companis may hav thir crdit ratings rducd du to poor acquisitions. For instanc, if on has stocks of Volkswagn of Grmany and is not awar of th latst Brazilian conomic policy and rstrictions on rpatriation of dividnds, on would miss th story on Autolation, a joint vntur Volkswagn has with Ford in Brazil and Argntina. Unfortunatly, for somon to watch for vnts in Brazil vn part-tim is too much a wast of rsourcs bcaus th rcours to information on Brazil is so infrqunt. Howvr, whn on dos nd th rcours, it is usually of utmost importanc bcaus Autolation, for xampl, is a big subsidiary of Volkswagn and can mak a big diffrnc to Volkswagn's global rsults. Th largr conomic nvironmnt has th following kinds of risks: intrst rats: changs in intrst rats drastically affct th ability of borrowrs to rpay and lndrs to rcuprat thir loans. yilds: yilds ar a rough masur of th rturn on financial instrumnts lik bonds. * basis: a basis point is a hundrdth of a prcntag point of som indx (.g. th Dow Jons Industrial Avrag). Changs in basis points affct a rang of corporat activity such as shar issus, takovrs and mrgrs, and stock valuation.

liquidity: this is th convninc with which a company can sll its assts. Changs in liquidity would rquir changs in th composition of assts that th company should optimally hold. Th political and rgulatory nvironmnt is anothr important sourc of risks: * political changs: ths can affct th gnral conomic philosophy of th govrnmnt, through fiscal and montary policis, for instanc. Ths govrnmnt activitis in turn affct th firm's xposur to othr kinds of risks (.g. intrst rats). * rgulatory changs: ths can in turn affct th xposur of th firm to othr kinds of risks lik intrst rat risks and cost of financial intrmdiation. For xampl, th rcnt rgulation for all Saving and Loans association to liquidat thir junk bond holdings has dramatically incras th volatility and rduc profitability of th high yild bond markt participants. capital rquirmnts: financial intrmdiaris ar rquird by law to conform to crtain capital rquirmnts as collatral for lnding. Changs in ths rquirmnts will affct th costs of financial intrmdiation. As most financial institutions oprat in an intrnational nvironmnt, additional risks ar involvd: * xchang rats: changs in xchang rats can hav potntially larg impacts on th profitability of ovrsas oprations. For instanc, thr is a strong ngativ corrlation for U.S. invstors in Dutch quitis. Th big Dutch companis sll thir products pricd in dollars. Howvr, thir shars ar pricd in guildrs, and th companis ar so larg thy dominat th Dutch financial markt and conomy. If th dollar gos up, th guildr gos down. So although th shar pric may incras as th companis sll mor for dollars, thir vry succss drivs down th guildr. Th U.S. invstor loss his quity gain in th nw xchang rat. country: diffrnt countris hav diffrnt risk profils, and financial institutions should b awar of thm. Th rcnt Latin Amrican dbt crisis is an xampl. Finally, vn th intrnal oprations of th firm ar sourcs of risks: systms failur: ths can quit asily crippl th opration of th informationintnsiv financial institutions. fraud: insidr trading at scurity houss is an xampl. human rror in ntring dtails of th transactions that lads to incorrct assssmnt of risk positions. information intgrity is difficult to maintain whn ar duplication of th sam instanc of th data all ovr th organization. All th abov typs of risks intract with on anothr. For instanc, crdit risk of corporat (spcially junk) bonds incras whn markt risk (.g. Trasury rats) incras. Highr intrst rats may also affct various macro variabls, such as xchang rats.

1.3 Organizing for Risk Managmnt Givn th backdrop and many typs of risks, how do financial institutions organiz thmslvs to cop with risk? Thr ar thr aspcts to this organization, and w will discuss thm in turn. Th thr aspcts ar: th structur of th organization, th function and policis in th organization, and th risk monitoring systms in th organization. Th difficulty in sking to control intra-day xposurs is that for th information to b worthwhil, it has to b gnuinly up-to-th-minut. But gtting transaction information from th focal points of today's far-flung banking mpirs rmains a stiff task and byond th capabilitis of most banks. Th troubl is, vn as th driv toward cntrally controlld xposur and liquidity managmnt gathrs pac, thr is a similar momntum th othr way: th dcntralization of most dcision-making, du to incrasd complxity and pac of financial markts. Trading dsks hav rplacd xcutiv suits as th dcisiv nods in th major banks' policy-making structurs, and as th sourcs of th transaction data any risk-managmnt systm would nd to trawl togthr. As on Salomon Brothrs' forign xchang dirctor puts it: "Non of us vn has an offic any mor. W work on th floor all th tim-managing th positions, pricing, vrything. It's calld in-th-aisls managmnt." Most companis hav a structur of risk committs and ky individuals, which allocats clarly dfind rsponsibilitis for managing th companis' xposur to ths risks across all gographical locations and businss aras. A ky stp in structuring a risk managmnt organization is to stablish a ddicatd risk managmnt function. Within this function thr should b dsignatd individuals whos rsponsibilitis xtnd to all xisting and nw typs of risk. Th risk function should hav global rach and may coordinat an array of risk committs involving spcialists in aras such as crdit, intrst rats, forign xchang, quitis, bonds, and drivativ products (lik options and swaps). Th prcis natur of this function must b consistnt with th ovrall businss philosophy - for xampl, if thr is gnrally a dcntralizd managmnt approach thn th risk function could also b dcntralizd. Howvr, in all cass, thr should b a "cntr of xcllnc" which rtains ultimat rsponsibility for global risk managmnt and which is to som xtnd indpndnt from th trading aras. Policis and limits quantify thos lvls of oprations which may accptably b carrid out by th companis' xcutivs. This rquirs a hirarchy of limits to rflct th stratgic, tactical, and oprational lvls of managmnt. A balanc nds to b struck btwn nsuring that th businss oprats in a controlld mannr, whil allowing th firm's officrs th flxibility to mt rturn-on-capital goals. Financial institutions ar incrasingly using a mor formal approach to stablishing limits. This approach rflcts both th prcivd liklihood of loss from individual dals or groups of dals, and th capital which th institution is prpard to put at risk. Th liklihood of loss from trading positions dpnds upon th following factors: th volatility of ky rfrnc rats (.g. intrst and forign xchang rats), rsponsivnss of th dalrs and of th positions to chang in th rfrnc rats, and th liquidity or th ability to clos th position quickly in th vnt of an advrs movmnt in rats or prics. Ths factors can b stimatd, in th first instanc, from a statistical analysis of historical rats and dalrs' prformanc. Howvr, it is ssntial that such historical prspctivs ar rgularly rviwd in th light of constantly changing markt conditions. For this rason som financial institutions rly on th dalrs to dtrmin appropriat trading

lvls. Th tradrs ar usually in th bst position to apprciat th markt conditions at th tim of ach dal. Th trasury and capital markts units of intrnational banks ar incrasingly trading portfolios of a mix of on-balanc sht (.g. bonds) and off-balanc sht (.g. swaps and options) financial instrumnts. Thy must thrfor b abl to assss th risk xposur of th nt portfolio. For xampl, a fixd for floating intrst rat swap could transform a fixd rat long trm bond to a floating rat long trm bond whn viwd as a composit financial instrumnt. Bing a floating rat bond, it is lss suscptibl to intrst rat fluctuations. If ths two instrumnts ar viwd as indpndnt transactions, thy ar portraying a diffrnt risk profil. Many banks ar frustratd from achiving this goal by a prolifration of computr hardwar and softwar systms, which individually procss only a small numbr of producttyps. A numbr of swaps trading units hav dvlopd a gnric approach which nabls virtually any financial instrumnt to b mathmatically modlld as a sris of common vnts, ssntially cash flows. Th ffct of movmnts in volatility and intrst rats, th slop of th yild curv, or th sprads btwn diffrnt instrumnts can b b computd by calculating th prsnt valus of th cash flows using appropriat zro coupon yild curvs. Som banks now us th masur lablld "Pric Valu of a on Basis Point shift" (PVBP) to monitor th snsitivity of th portfolio to such movmnts. Gnric approachs could b xtndd across many aras of a financial institution to provid a global mthodology for masuring, and ultimatly controlling, its worldwid xposurs to ths typs of risks. Onc ths risk-rlatd issus hav bn addrssd, th financial institution thn facs th problm of dvloping appropriat risk monitoring systms. Such systms, prdominantly computrizd systms which nabl th rsponsibl individuals at appropriat lvls of th institution's risk organization to monitor th actual businss against ths policis and limits at all tims. Th risk monitoring systms ar th bdrock of th risk managmnt framwork. Thy must b dvlopd in th contxt of th companis' intrnational risk profil and th structur of thir risk policis and limits. Individual companis will diffr in thir businss philosophis, and thrfor th way in which thy allocat rsponsibilitis for managing risk. Thr is consquntly a wid divrsity in th natur of ths monitoring systms. Th first hurdl to ovrcom is oftn th failur to dvlop a global information tchnology stratgy. This rsults in a lack of consistncy of computr hardwar and softwar both within and btwn gographical locations. It is thrfor impossibl to intgrat consistnt, accurat, and rlvant risk information on a timly (prfrably ral-tim) basis. This problm can b xacrbatd by a failur to includ risk managmnt information rquirmnts in th spcification of th undrlying transaction-procssing systms and th lack of control ovr th intrfacs with xtrnal information sourcs. In a dcntralizd nvironmnt this stratgy problm can b ovrcom, at last in part, by dfining global corporat data standards for risk managmnt information. Th rsulting information can thn, if ncssary, b consolidatd cntrally for th purposs of rporting to th had of th risk managmnt function. Softwar tool kits, such as th Risk Data Consolidation Systm (RDCS) dvlopd by Cumulus Systms Limitd of th UK for a DEC Vax nvironmnt, can b usd to draw such information from a varity of computr hardwar and softwar systms. In a cntralizd nvironmnt thr is an incrasd rquirmnt for larg cntral databass of transaction-lvl information. Howvr, th ambitions of som financial institutions to build such systms in-hous, to covr all concivabl global banking products and srvics, hav oftn bn frustratd by thir high cost and complxity. Thr is now a trnd to

rstrict such dvlopmnts to mor-limitd businss ars, within a global framwork of data and systms standards. Th scond challng facd by many financial institutions is to manag th transition from a varity of systms, which hav volvd ovr a long priod of tim, to an intgratd systms architctur for risk monitoring purposs. In th trading aras of many financial institutions ths systms ar ntirly sparat, dspit th fact that th transactionprocssing and risk monitoring functionality of both ar oftn vry similar. In th absnc of an intgratd systm, with on-tim input for ach dal, thr may b wastful duplication of ffort and a lack of consistncy of risk-rlatd information btwn th two systms. Th idal and most fficint architctur for ths systms is on which uss a common databas of transaction-lvl data to driv all front offic, back offic, and risk monitoring nds (plas s Figur 2). This architctur hlps to bind togthr th various dpartmnts and data sourcs involvd in risk managmnt. It also gnrats a "middl offic" which has primary rsponsibility for nsuring th quality of th transaction-lvl databas and of th risk information usd in all aras of th financial institution. Howvr, most financial institutions today cannot raliz an idal architctur such as that in Figur 2. Just th numbr of rsarch and nws sourcs alrady ovrwhlms th managmnt of risk. Considr th following kinds of information that risk managmnt systms hav to considr: quotations. Th quotation businss is now 2 arlir shows th major playrs. mor than a fw billion dollars in siz. Tabl Trading dsks ig Sttlmnt and claring. dpartmnts ns lisk Excutiv, Top managmnt Crdit admiinstration dpartmnt markt Figur 2: An idal, cntralizd architctur for a risk managmnt systm.

data collction. Thr ar fiv major catgoris in this sctor: - corporat financial information about companis' balanc shts and incom statmnts, SEC rports, industry information, and historical financial prformanc. Som of th vndors in this ar includ Disclosur, Florida-basd Q Data, Standard & Poor's Compustat srvic, Dow Jons's nws srvic, and importantly, intrnal programs oprating at most major institutions. - nvironmntal information which includs conomtric information providd by firms such as Data Rsourcs, Chas Economtrics, Townsnd-Grnspan and scors of othrs that ar now availabl to ssntially anyon through on-lin databas systms. On important thing to rmmbr, howvr, is that no carrir or computr will tll you which srvic is accurat. - comptitiv information provids information about activitis of diffrnt brokrag firms and banks in th financial markts and includs rankings of thir comptitiv prformanc and listings of various catgoris of ladrship, such as prformanc of thir offrings in th aftr-markt. Supplirs of ths srvics includ Invstmnt Dalrs' Digst, Scuritis Data (a subsidiary of Capital Citis Communications), Standard & Poor's MarktScop srvic, two srvics providd on Tlrat and many othr. Again, most major brokrag houss also do thir own intrnal analysis. - scuritis information answrs qustions such as who owns what, who's buying what, institutional intrst in particular scuritis and what scuritis companis hav offrd for sal. Two of th lading vndors ar Computr Dirctions (Baltimor) and H.F. Parson (N.Y.). - financial nws is availabl both slctivly and through broad tap mchanisms. Th obvious supplirs ar th Dow Jons broad tap, Dow Jons Nws Rtrival, Rutrs, and most quotation srvics. * opinion vnding. If you want information from th invstmnt nwslttrs, conomic advisors, or rsarch analysts or just about anyon ls who is influntial, you just hav to prss a fw buttons. Through nws ntworks such as NwsNt, ADP's ntwork srvics or svral othr ons, you can find out what Valu Lin thinks of a particular company or what a rsarch analyst has said in th Wall Strt Transcript or what Fd Watch thinks th mony supply figurs will b, or arnings stimats from Lynch, Jons & Ryan. analysis. Suppos you hav a particular problm bsids an invstmnt dcision and you want th data analyzd and an answr providd. By combining srvics offrd by firms such as Data Rsourcs, Chas Economtrics, and ADP, with softwar by outfits such as Lotus, VisiCorp, Contxt MBA, and MultiSoft, you can start with a hypothtical mthodology and bring it to its logical nd by accssing data that th databas sarchs for with only th most gnral spcifications. Th computr thn downloads this data into an intgratd spradsht program that hlps provid th answr. xcutiv srvics. Onc you hav all th answrs both for your firm and for your customrs, you want to mak somthing happn, that is, crat businss. If you happn to b a brokrag hous, you can now fd all this data to your customrs, and thy can call back your computr with an ordr. You can thn tak this ordr, or ordrs whr you ar a principal, and gt instant guarantd xcution through som xchangs and

through srvics such as Instint. Aftr xcution th trad can thn b clard through a similar typ of black box arrangmnt. Th abov rang of information sourcs ar usd in most financial institutions, and thr ar th sam sourcs that risk managmnt systms rly on. Anothr dimnsion that drivs th dcision of what sourcs to hav and us is control. Many smallr firms and som of th largr ons hav bn lss concrnd about control and hav allowd thir brokrs, analysts, loan officrs, tc. to mak thir own quipmnt and databas dcisions. In this cas, with th gnral xcption of quotations, th usr pays th bill instad of th corporation. This obviously savs mony for th corporation and importantly, allows an mploy to purchas th srvic that will bst bnfit productivity. Th companis that allow this approach and ar succssful hav st up advisory srvics to hlp usrs formulat plans and idas as wll as to monitor usr activity and thus minimiz th control risk. This has cratd a spirit of coopration which has improvd mploy rlationships whil maintaining th ntrprnurial spirit that drivs much of this industry. On firm that has don a fin job in this ara is Mrrill Lynch, but w now know that its controls wr not sufficint for risk managmnt. Th Mrrill Lynch approach has important advantags. It lts th individual "do his own thing" whil guiding him or hr in th right dirction. Thr is nothing wrong with brokrs buying prsonal computrs and accssing intrnal or xtrnal databass and th lik as long as somon can hlp thm dcid what products ar bst suitd for thir nds, hlp train thm, and us th buying powr of th organization to sav thm mony and tim. Th quid pro quo is that th brokrs will act in a profssional mannr and follow th guidlins mandat by th organization. Bfor th Mrrill Lynch loss in 1987, som vn say that with this approach, "th corporation ntrtains no mor control risk than it alrady accpts by giving its mploys tlphons." And of cours, this turns out to b fals. Softwar supplirs hav idntifid a gap in th markt, pnding compltion of dvlopmnt by som banks of thir own systms to handl th mor xotic financial instrumnts. Application packags such as EMS, dvlopd by Dvon Systms, and Cmark from Quotint, addrss th nma of managing risks across th rang of instrumnts which ar typically tradd by banks' swaps units, for xampl. A ky fatur of th nwr systms is th ability to masur th countrparty crdit risk associatd with off-balanc sht instrumnts. This involvs monitoring th loss which could b incurrd by th institution if th countr party dfaultd. In such instancs, th loss would b th cost of rplacing th dal in th markt at prvailing rats. Thr is consquntly a nd to constantly updat th crdit xposur as markt rats chang. Any bank which doubt th importanc of this facility should considr th unnviabl situation of institutions which hav swap contracts outstanding with local authoritis and building socitis, or option contracts outstanding with privat individuals. Th scop of risk managmnt systms can b xtndd to covr not only th monitoring of risk positions but also th rporting of daily profits and losss. Daily profit and loss rports, basd on rgular rvaluations of opn positions, hlp tradrs in vrifying thir positions. In addition, it also nabl snior managmnt to idntify trading problms at a rlativ arly stag. Institutions can also tak th additional stp of valuating prformanc in rlation to th actual lvl of risk xposur. This masur introducs th concpt of risk-adjustd profitability which involvs comparing profits and losss to th lvl of risk (and hnc risk

capital) incurrd. Th rquirmnt can b incorporatd within th spcification of th risk monitoring systm. Anothr trnd in risk managmnt systms is to go byond monitoring to modlling. A fw of such modlling systms xist now, but th information is usually not sufficint in quantity or timly nough. It is clar that most xcutivs do not xpct or bliv thr should b a standardizd systm. "An xtrnal intrst rat systm should b standard so that vryon has standard formats. It would mak intrst rats asir to track. But procssing has to b customizd. Intrnational mutual funds ar totally diffrnt from bank pnsion funds, for xampl." 4 Mor than most organizations, banks and scuritis houss hav to addrss an incrasingly wid rang of risks. Som financial institutions hav historically concntratd upon standard lnding or crdit risk. Thy hav thrfor faild to manag adquatly th mor complicatd markt and countrparty risks associatd with rcnt advancs such as swaps and options. 1.4 Bnfits of Risk Managmnt Systms Som of th bnfits of risk managmnt systms hav bn mntiond arlir. W now rcapitulat ths bnfits as wll as laborating on som additional ons. Th primary bnfit of a risk managmnt systm is to focus th rsourcs of th financial institution on its bst clints. Without a risk managmnt systm, tradrs and othr lndrs may b lnding byond thir crdit limit for th borrowr. Similarly and for th lack of sufficint information, tradrs may b ovrly consrvativ, lnding lss than thy could. With sufficint information, financial institutions can "doubl, tripl, or quadrupl volum" without adding trading staff. 5 This is point rflcts th classic tradoff btwn risk rduction (or hdging) and rsponsivnss. A company nds to b rsponsiv, but rsponsivnss mans dcntralization bcaus xprtis rquird for rsponsiv actions ar distributd throughout th company. Howvr, distributd rsponsivnss maks risk rduction difficult bcaus risk rduction rquirs cntralizd captur of information. From a snior managr's prspctiv, a risk managmnt systm allows him or hr to monitor th typ, siz, and rsults of th tradrs' bts. With such information, thy can ordr changs or qustion trading movs without intrrupting trading activity to xtract information. Anothr bnfit of risk managmnt systm is to cancl out rdundant dals. For instanc, a Nw York tradr may tak hdg positions that duplicats a Tokyo position. A risk managmnt systm provids information on such rdundant dals, saving th company th commissions and intrnal procssing of th unncssary dals. Howvr, it is gnrally rcognizd that th amounts of th commissions rlativ to thos of th dals ar insignificant. 6 Furthr, th marginal savings achivd may not b sufficint to warrant th additional co-ordination btwn th tradrs, which may not b fasibl in vry volatil markts. 4 Brnnan, Ptr J. "Portfolio Managrs Wathr Global Risk Managmnt Challng," Wall Strt Computr Rviw, Octobr 1989, pg. 53. 5 Marion, Larry. "Crating a Global Outlook," Institutional Invstor, March 1987, pg. 232. 6 Marion, Larry. ibid.

A final bnfit of risk managmnt systms com from its cntralizd natur. Tradrs and clrks ntring th transactions into systms quippd with built-in global-limit monitors could b mor fficint. Th numbr of back-offic mploys rquird to support trading activity may also b rducd. 1.5 Tchnological Rquirmnts for a Risk Managmnt Systm With th abov in mind, w can lay out th rquirmnts for an idal risk managmnt systm. b ral-tim. Frquncy of risk managmnt dpnds on th liquidity and volatility of th markt in qustion. For xampl, a daily position is mor than suffic for most of th markts whn thr ar no turbulnc, and hourly or vn up th minut positions may b ncssary whn thr ar turbulncs. Furthr, th priod of monitoring may also dpnd on th siz of th position that th financial institution has takn. Sinc "ral-tim" is difficult to dfin, on can start by dfining "ral-tim" to man rsponding within a prst bound. A ral-tim systm can provid th rsponsivnss inhrntly rquird for risk managmnt. It would b vn bttr if th priods for diffrnt markts could b asily modifid for catr for diffrnt nds. can dynamically allocat of capital and limits. Th dynamic stting of trading constraints hlp nforc limits on xposur. Th ability is to not to liminat it, but to assum and manag it in accordanc with th bank's short-trm and long-trm rsourcs. Howvr, th bnfits of dynamically allocating th limits may not justify th normous rsourc rquirmnt for a markt that th financial institution is not too activ in. support a broad spctrum of analytical nds. Facilitis for simulation, snsitivity analysis, xposur calculations, and tim sris analysis ar important in providing incntivs for usag of th systm. Just as important as th analytic is th tradr's undrstanding of th computations involvd. Many financial institutions ar rluctant to gt a black-box analytic program-th minimum must b an xplanation of th algorithms involvd in th computations. - hav a suitabl human-computr intrfacs. Complmnting th analytical tools must b usr-frindly intrfacs that liminat th hurdls for usrs in th actual us of th systm. can b ralistically implmntd, givn th xisting nvironmnt. For instanc, th trading rooms in many banks ar mor sophisticatd than thir back offics. Concpts lik th "middl offic" crats a buffr that can function as a databas quot srvr or ntwork managr, so that a bank can build th intrfacs to an improvd or nw backroom opration ovr tim whn it is rady to b intgratd into th total systm. is flxibl. Givn today's volatil financial nvironmnt, risk managmnt systms must b asily tailorabl. For xampl, nw sourcs of information must b asily intgratd into th systm. Salomon Brothrs of London addd an accounting databas as an information sourc for its risk managmnt systm only in 1987, whn th systm has bn running for many yars. In th sam yar, Salomon Brothrs also incrasd its paid-in capital for its Tokyo offic by $300 million. This allows th company to b a major forc in th Japans financial markt-it can trad yn bonds and yn quitis th

way it trads scuritis lswhr in th world. 7 With this incrasd financial commitmnt, th risk managmnt systm nds to accommodat yt anothr sourc of information. A risk managmnt systm should also b modular and robust, so that th failur of on sourc of information should not hampr th ntir systm. support cross-product and application data. For instanc, a tradr nds to prform split-scond comparisons of diffrnt trading opportunitis in ordr to slct th bst "buy" with th most limitd risk. On of th problms with supporting cross-product and application data is th difficulty of assimilating information from disparat sourcs. This problm is spcially intricat with intrnational sourcs of information. Govrnmnt policis, such as thos concrning th filing of corporat rports, ar highly inconsistnt across national bordrs and pos a daunting challng to databas providrs who aim at a uniform format for data fd. Furthr, such vndors ar alrady facing problms with data supplid by third partis. Concrning scurity prics, for instanc, th original supplir oftn dos not maintain historical data with adjustmnts for all th corporat actions, including dividnds, symbol, and CUSIP (Committ on Uniform Scuritis Idntification Procdurs) changs. Som sourcs lik Rutr's IDN data fd compnsat for such povrty in quality by providing historical information. Furthr, th ovr 200,000 instrumnts in IDB ar idntifid with uniqu Rutr Instrumnt Cod (RICs) so that on nd not worry about SEDOL (stock xchang daily official list) numbrs, CUSIP numbrs, tickr symbols, and othr scurity idntification schms. Othr vndors combin thir information sourcs for improvd consistncy. For instanc, Tlkurs (North Amrica) Inc. of Stamford, Conn. and Standard & Poor's/McGraw-Hill jointly publishd th "Intrnational Scuritis Idntification Dirctory." This dirctory stablishs a standard nin-charactr scurity idntification numbr calld CINS, an acronym for CUSIP Intrnational Numbring Systm. Similarly, Nw York-basd Knight-Riddr Financial Information also is going in for intgration, but of its own products by combining its MonyCntr and Tradcntr products. Dow Jons Nws/Rtrival plans to com up with a nw on-lin srvic nxt yar calld DowVision. It will b a composit pr-procssd fd of fiv Dow Jons wir srvics and two from othr vndors, initially snt ovr trrstrial lins. Today with ovrlapping financial markts, th lin that sparats on from th othr is a vry fin on. 1.6 Risk Managmnt Systms Today W will brifly dscrib a fw risk-managmnt systms in us today, and highlight thir strngths and shortcomings 8. Citicorp Invstmnt Bank put considrabl ffort into building its Global Tradr computr systm. This is a ral-tim ntwork using VAX 2000 workstations from Digital Equipmnt Corporation. Th workstations ar linkd throughout th trading room using DEC NET and to Citicorp's worldwid communications systms using Ethrnt. Th bank's various trading softwar systms-such as Trstl, Dog Fox, Gms, and Global Rports-ar linkd to th Global Tradr Systm. This systm also offrs on-lin connctions to th back offic. Th Global Tradr Systm has bn installd in London, Paris, Frankfurt, Tokyo, and Singapor. In ach of ths cass, softwar was not built on top of xisting accounting or back-offic systms. Instad, it is dsignd as a full-blown trading risk-managmnt application. 7 "Salomon Sitting Nxt to Japan's Nxt Four," Euromony, March 1987, pg. 145. 8 Various issus of th Wall Strt Journal and Euromony.

Bankrs' Trust has an automatd dal-ntry and risk managmnt systm calld Rsourcs Managmnt Onlin Systm (REMOS), which it jointly markts with DEC. Finally, Chmical Bank's risk managmnt systm runs on IBM Systm 38 computrs. Lik REMOS, this systm was dsignd to support trading activitis, and not just to book and procss transactions. Mor importantly, Chmical Bank's systm has ral-tim positionkping capabilitis, allowing snior managmnt to gain an instant snapshot of th firm's risk xposur and profit and loss at all tims. At Wall Strt's lading scuritis firms (as opposd to th commrcial banks mntiond abov) such as Salomon Brothrs, such information is oftn only availabl at th nd of th day whn back-offic clrks hav kyd in th day's trading tickts into batchprocssing computr systms. Th problms bgin arly in th procss whn tradrs tnd not to input th transactions compltly, vn whn thr is a ral-tim systm to provid rror dtction at sourc. In fact, most trading transactions ar currntly compltd not on computrs but ovr th tlphon. Book-kping dtails that might offr company dirctors a sns of what is going on ar compltd much latr. At Salomon Brothrs, at th nd of ach day, trading positions ar transmittd via facsimil across th ocan to its ovrsas offics-in an ra whn tchnology xists to pass th book or blottr lctronically. Gnrally, th thinking gos that tradrs ar hird to trad and clrks ar thr to rcord th transactions. Sinc global risk managmnt systms rly havily on th intgration of information, w nxt dscrib commrcial implmntations of information systms that fd data from multipl sourcs. 1.7 Multipl-sourc Information Systms Today On multipl-sourc information systm is th Global Rport from Citicorp. Th mnudrivn srvic is xpanding, and rcnt additions includ incorporation of a Citicorp srvic calld CitiMarkts, which covrs th Asian financial world and includs graphics capabilitis. Global Rport also rcntly inauguratd a forign xchang rats srvic; work is undrway to intgrat ths srvics. Th systm has an indx which allows usrs to rtriv information basd on subjct. It also allows usrs to gt from a numbr of sourcs information on on company. Worldscop is an ongoing projct of th Cntr for Intrnational Financial Analysis and Rsarch (CIFAR) in Princton, N.J. and Wright Invstors' Srvic, Bridgport, Conn. It prsnts data from 24 countris and 27 industris in a uniform format which its human compilrs assrt will allow usrs to do "appls to appls" comparison for data from sourcs with diffrnt accounting practics, varying xchang rats, and numrical formats. Although a srvic such as Worldscop adjusts for disparat national accounting procdurs, at last in thory, not all potntial usrs want th data that way. Sombody who knw th Frnch markt xtrmly wll would prfr unadjustd information for that markt bcaus h or sh would know th accounting procdurs and would adjust accordingly. On th othr hand, for popl who ar just intrstd in a broad ovrviw, such as pnsion funds, it is asir to us somwhat standardizd information bcaus it savs tim. National Invstor Data Srvic's NIDSGLOBAL not only provids complt rporting to invstmnt managrs about thir multi-currncy invstmnt portfolios but also forms th basis for th books and rcords of th invstmnt funds, bcaus it can updat rgularly th tax data that managrs nd to us. Th multi-currncy vrsion of th systm runs on Data Gnral's MV machins and DEC's VAX sris of computrs. At th cor of th systm is its

ability to stor country-spcific tax data on a global basis and translat th implications of trads and transactions within on country in th currncy of anothr. Gains and losss basd on changs in th valu of a currncy also ar capturd and availabl both for currnt and futur rports. Morovr, th systm stors nough contmporary tax data for countris so as to calculat and rport th valus of various transactions basd on th tax laws and rquirmnts of various countris. Financial institutions us th systm to valu thir global portfolios both in th local currncy and in th U.S. currncy or using any currncy rqustd by thir clints as th bas currncy. Anothr issu is doubl-chcking of prics from diffrnt sourcs to nsur accuracy, but that mans finding sourcs that ar truly indpndnt. Most intrnational financial data winds up coming from a vry fw ultimat sourcs. Rutrs, for instanc, provids prics to Extl, which in turn provids that data to many additional partis. Tlkurs AG, a Swiss company with a fairly nw North Amrican subsidiary, Tlkurs Inc., turns out to b th only othr indpndnt sourc. Salomon Brothrs uss both Rutrs and Tlkurs data fds to balanc ach othr out. 75% of th tim thir data agrs on itms such as th amount and data of a dividnd paymnt. On th othr 25% thy wr not vn clos. Th sourcs of ths figurs ar oftn obscur printd itms in forign languags. Confirmation is virtually impossibl. Unfortunatly for Tlkurs, th nod most oftn gos to Rutrs in thos diffring cass. This is bcaus Salomon's larg institutional clints,who hav th rsourcs to indpndntly chck prics, traditionally look to Rutrs as th ultimat sourc. Of lat, howvr, th rlationships btwn data vndors ar shifting a grat dal, making it ncssary for Salomon Brothrs to bring in vry possibl data sourc to nsur accuracy. Th unautomatd collction procss in forign markts crats problms for firms such as Salomon Brothrs who guarant portfolio prformanc against various indics. How that indx is calculatd and th data that gos into it is vry important spcially if it is th company's own indx. If an institutional clint doubl chcks data, Salomon might hav to xplain why on a crtain dat, a pric from Rutrs was dmd inaccurat and a pric from anothr vndor was substitutd. Also, what is an official pric? For instanc, th indx of th Frankfurt Stock Exchang is calculatd basd on prics takn at 12:30 local tim, though th markt rmains opn for som tim aftr that. Yt languag in som contracts may call for using a closing pric, or in othr cass an opning on. Country-basd scurity idntifirs also diffr. On major problm is th lack of rliabl information about fixd-incom instrumnts ovrsas, which is vn wors than som scuritis data sinc many fixd-incom scuritis trad off xchangs. Th insid scuttlbutt is that xchang prics for fixd-incom ar not rgardd as rliabl prics. Howvr, th Tokyo Stock Exchang snds out a sris of data fds containing th sam databas, but ach on progrssivly clanr. Th xchang itslf has takn on th rsponsibility of vrifying th data, corrcting it, and snding it out corrctd. 1.8 Th Ag of Synrgistic Alliancs Many softwar firms, data fd vndors, hardwar companis, and financial institutions thmslvs ar prparing to form alliancs that will lad to th bttr systms for risk managmnt in th futur. Undr ths stratgic alliancs, partis ar fr to tam up with satllit partnrs, as long as thy orbit th cntral partnr. On stratgic allianc cntrs on th Unix oprating systm. Wall Strt is looking for htrognous multi-vndor solutions, and Unix is prcivd to support opn architcturs that can connct to various Unix-basd workstations, spcially in th trading arna. Howvr, th Unix allianc has its problms with standardization. Two major groups of vndors hav announcd diffrnt vrsions of Unix as standard.

Anothr kind of allianc is by information vndors. For instanc, Tlrat Systms acquird CMQ Communications, Inc., Canada's lading markt data vndor. Mor rcntly, Tlrat formd a stratgic allianc with AT&T to dvlop an lctronic systm for forign xchang transactions. Tlrat also formd an agrmnt with Intx, to jointly markt and dvlop automatd markt systms for us by xchangs and xchang mmbrs. Intx Holdings, Ltd. oprats an lctronic futurs ntwork. Finally, Tlrat also joind with Lotus Dvlopmnt Corporation to provid a gnric tool kit for tradrs. On final kind of allianc is by financial institutions. For xampl, Mrrill Lynch's capital markts ara uss th Bloombrg systm, a ral-tim analytic packag for fixd-incom scuritis. It also has a 30% quity intrst in th company. Mrrill Lynch also contribut corporat and govrnmnt bond prics to th srvic. With Automatic Data Procssing (ADP), Mrrill Lynch is dvloping capital markt analytic, and with Data Broadcasting Corporation (DBC) of Vinna, Va., it is offring FM-broadcast data fd. 2. RISK MANAGEMENT AT SALOMON BROTHERS Salomon Brothrs is activly involvd in th fixd incom scuritis and drivativ products markt, whr products lik govrnmnt bills, nots, bonds, corporat bonds, options, and swaps ar tradd. Bing a markt makr for many financial instrumnts, Salomon Brothrs ar xpos to th various typs of risks that ar dscribd in th arlir part of this papr. In th past two dcads, th pac of th financial markt has bn incrasd rapidly and customrs ar dmanding bttr srvics from th financial institutions. Th natur of th businss has changd from on of trading in a fw financial instrumnts in larg volums to that of daling in mdium volum but involving a wid rang of instrumnts. Furthr, nw instrumnts, which could b drivativs of xisting instrumnts, ar constantly bing introducd into th markt. A dynamic and rsponsiv information systm is ncssary to compt ffctivly in this incrasing sophisticatd financial markt. Currntly, Salomon Brothrs has about 15,000 transactions pr day involving ovr 100 financial instrumnts. All ths products ar supportd by 12 to 24 information systms. 2.1 Structur of Salomon Brothrs' Organization for Risk Managmnt Thr is a risk committ of ky individuals who hav clarly dfind rsponsibilitis for managing Salomon's xposurs to th various risks arising from all gographical locations and businss aras. Ths individuals ar th had of th various businss units lik crdit, rtail, capital markts, and its intrnational oprations. Within ach of ths functional aras, thr ar dsignatd individuals whos rsponsibilitis xtnds to monitor all xisting and nw typs of risks in th various markts. Ths ar usually th managrs or hads of th trading tam. Furthr down th organization, thr ar spcialists who ar knowldgabl of diffrnt product typs. Exampls of xprtis ar: rtail customr crdit valuation, corporat bond rating, intrst rat, forign xchang, option pricing, swap pricing, and high yild bond valuation. Thy do not hav an indpndnt non-trading individual who is rsponsibl for th ultimat global risk managmnt.