http://www.integral.com's debut this month promises small corporates swift and low-cost risk management analysis.

By Maureen Callahan, Ph.D.

Almost a year ago Integral Development Corp. unveiled what seemed to be a "breakthrough" far beyond the usual use of the word. "The world's first on-line risk management system for derivatives delivered via the World Wide Web portion of the Internet," the press release promised. It further claimed that "RiskNet enables corporate and municipal treasury managers to see their exposures and pricing 24 hours a day, seven days a week from virtually anywhere in the world."

This clearly would be a leap beyond the available risk management tools on the Net, previously limited to a handful of options pricers. RiskNet was great news for laptop warriors sunning themselves at the beach or CFOs on business trips to Singapore seeking daily pricing on their swap portfolios back home. Scheduled for release at year-end 1995, this plug-and-play Everyman system evidently needed the benefit of an extra six months of further tweaking and beta testing.

This summer RiskNet is scheduled to finally deliver on its promise. With its first production release, RiskNet will provide industry standard financial analysis of vanilla portfolios for corporate managers who have neither the budget nor desire to hire their own quants or learn the joys of Unix. RiskNet delivers sophisticated risk management analysis as well as objective and accurate pricing. It also provides value-at-risk exposure analysis, based in part on daily data downloads from JP Morgan's RiskMetrics site.

The first production model of RiskNet will be similar to the features of the final beta test, which I spent time on: MTM, P/L, PD sensitivity and straight delta RiskMetrics on basic vanilla portfolios. The service supports very basic fixed income derivatives, currency and interest rate swaps, FRAs, caps/floors, FX spot and forward (in the major G-7 currencies), ED futures and U.S. Treasuries.

Spokespersons for Integral say the likely monthly user fee should be negligible; "less than the cost of some industry newsletters," coos the publicity material. The main economies are in the lack of additional hardware or software or data costs or support staff or sysad types or even lawyers, since RiskNet claims to update report formats that allow users to keep pace with evolving disclosure requirements.

Slick Look And Feel

RiskNet interfaces have the look and feel of a high-end system. The software engine is something called the Integral Development Framework (IDF). The company says it is a true dynamic object-oriented programming environment, portable across all platforms, already operational at some financial institutions, that creates, trades and manages exotic derivatives instruments and portfolios. IDF has been integrated into Web HTML architectures and has been extended to the RiskNet application set. With IDF, one can create, test and deploy new trading systems simply by dragging and dropping objects onto a screen.

Initially it was hoped that RiskNet could run on any browser, but experience has shown that only Netscape 2.0 is suitable. Users can access it from UNIX workstations, PCs or Macs. Another drawback: the variable access speeds everyone experiences on the Net. Some days it seems that Netscape has lead feet.

At the moment there is nothing similar to RiskNet's amalgam of transglobal Net access and links to sophisticated derivatives computations. JP Morgan's RiskMetrics, for example, is essentially a collection of volatility and correlation data, not a simple package designed to help business people get a handle on their risk. However, RiskNet is clearly not designed for large banks, broker-dealers or sophisticated corporates-or those prepared to sink significant sums into state-of-the-art risk management systems. Yet it might, sometime in the future, be adaptable to networked risk management systems.

Chances are that RiskNet will find a broad user base not only among individuals, but as a feature of dealers' private-label risk reporting systems that are rumored to be under development.

Before going into RiskNet for the first time, I concocted the following portfolio: 1) a floatfixed five-year interest rate swap with uneven conventions and 3 years to run; 2) a far forward starting floatfixed interest rate swap; 3) a fixedfixed currency swap.

On logging in, the viewer is confronted with RiskNet's menu on the Web, which is hotwired to the following sectors: 1) daily summary; 2) portfolio; 3) risk management; 4) market data; and 5) operations, a sub-site currently under construction.

RiskNet's market data is quite straightforward. The raw data is acquired real time from the key data vendors to RiskNet's Palo Alto server. Curves by currency are built by continuously compounding forwards using market standard instruments. When I logged on, the curve began at one month and ended at 10 years, but Integral was easily able to extend it from zero to 30 years. Integral picks the instruments and builds the curves reasonably well, considering their target user market.

The discount factors of Integral's curve compared accurately with data that I got from a top derivatives dealer who used a high-powered proprietary system with real market data. It was only at the fourth decimal place that the comparison test revealed any difference. Admirable though this result may be, it is clear that the user's lack of freedom in choosing instruments and curve-building methodology could turn off some more sophisticated prospects.

Next I went to "portfolio" and entered my positions. The screens proved easy to navigate. There's a short form for the vanilla instruments like interest rate and currency swaps, and a long form for people with more unconventional deals who need to supply more parameters to describe their deal accurately. I used the long form for the interest rate swap with uneven conventions, entered the data, clicked, and SHAZAM-RiskNet produced good mark-to-market numbers in less than a second. This is a key attribute to the system. Timely, actionable information is at the heart of risk management. RiskNet's response time was entirely acceptable. For example, if you are looking at a VAR analysis at 90 percent confidence and decide that you'd be more comfortable at 99 percent, you can just make the change and click "redisplay." In a heartbeat you can see the new number. Although the system will be a snap for derivatives sophisticates, a first-time corporate user would definitely benefit from documentation. On-line and printed manuals explaining financial analytics and proffering tutorials are promised soon. This will be a welcome addition to their on-line updates of release notes to improvements to the system.

The most attractive feature for corporate users is likely to be the daily exposure summary, which provides a multicolored graph displaying daily profit and loss, as well as daily earnings at risk along with summary numbers which underlie the graph. To dig deeper, one merely moves to the "risk management" page to get portfolio profit and loss numbers and their attributes (trading profit and loss without carry). You can also parallel-shift the curve to see changes in value or run partial differential sensitivities. You can also get VAR based on delta RiskMetrics-which was fine for a portfolio like mine which is option free.

A Brilliant Future?

What are the limits to RiskNet? What you see is what you get right now: it's vanilla risk management, though in the future its functionality should expand to more instruments, more asset classes, more analytics, more engines. Perhaps one day it could be used for trading and/or transaction processing, but that day seems a long way off.

Security, a key concept in financial transactions, is an open issue. Spokespersons for Integral say any data sent to RiskNet on the Net is encrypted, and the unencryption is hardware enforced. Dial-up lines or T-1 lines provide increasing degrees of security. Beta testers are also warned that in order to preserve security, they must not linger in Netscape to check the weather or browse another Web site, because RiskNet cannot guarantee that someone else won't capture their password and see and contaminate the data. The system warns, "If you don't exit now, you will enable others to access your RiskNet account without your authorization!"

Whither RiskNet? Its future lies in its distribution channel, the Internet. As the Net becomes more reliable, more secure and more speedy, it will be an easy decision for modest corporations to look to RiskNet (or the Wall Street firms who private-label it) to help them get a handle on their financial risks.

Traditional financial technology firms are typically delighted to have a few dozen clients after many years of operation. RiskNet's potential customer base runs into the many hundreds within a year. Because of its ease of use and negligible start-up costs (everyone has a PC; Netscape is a mere $49.95 to buy and also available on shareware), RiskNet could become the McDonalds of risk management.