Reviewers test-drive TARgA, a bargain-priced software package that combines meat-and-potatoes risk management with high-end pricing and analytics

When JP Morgan announced with much fanfare last winter that it would provide its RiskMetrics covariance data free to the public to promote the growth of value-at-risk measurement, it also announced a "but." The bank wasn't getting into the software business - it had signed up others to write the programs that would put its data to work. For the most part, software vendors stepped up to the plate, creating VAR add-ons to their standard packages.

The one exception was Price Waterhouse, which created a stand-alone product to meet the demand it found from many consulting clients. PW's Risk ToolSet is a user-friendly spreadsheet style program that allows users to calculate VAR and define risk limits for portfolios of simple securities and derivatives. It can generate cash flows and mark-to-market values for fixed-rate swaps, options and futures; currency spot, forwards, swaps and options; individual equities and options; equity index futures, options and swaps; and some commodity futures, options and swaps. Despite its initial success, it became clear to customer service reps at PW that clients were beginning to outgrow its plain vanilla VAR-only mandate.

Meanwhile, Theoretics, a software company known for its dealer-quality front-end analytical system, began to recognize that many of its clients were hungry for basic risk management functions to add to their program's highly sophisticated structuring and pricing capacity.

The two firms teamed up to produce TARgA (Tactical Asset Risk Analysis System). TARgA is really a marriage of two separate products - the Risk ToolSet and the Theoretics system - integrated to create a front-office package with extended middle-office capabilities. While the two systems are not as fully integrated as they will be in the future, early TARgA users generally believe there are great things in store and that the two systems together are better than either package alone.

We invited three reviewers to test-drive the system: a risk management software consultant, a corporate risk manager and a portfolio manager.

Finn Christensen
Principal, Fusion Systems

What I immediately liked about the product was its spreadsheet-like look and feel. Although the Risk Toolset has limited spreadsheet capabilities (for example, it doesn't allow you to use formulas in the input fields), screen format is uniform throughout. And the Theoretics front end actually runs within the Microsoft Excel environment.

Instrument Coverage: The Theoretics piece of the TARgA system is capable of pricing some very complex structures, including exotic swaps and swaptions with caps and floors, all in a pretty short timeframe. In addition, the term-structure/curve generation module is very impressive. On the downside, Theoretics cannot handle mortgage-backed securities.

The Risk ToolSet, on the other hand, covers most standard, plain vanilla instruments (i.e., those instruments supported by JP Morgan's RiskMetrics). Exotic deals can only be entered directly into the ToolSet if they can be broken down on the cash flow level. For instance, floating rate notes (FRNs) might be broken down as bank deposits with maturities equal to the number of days remaining to the next coupon.

It should eventually be possible to directly import exotic deals from the Theoretics system into the Risk ToolSet. And an ODBC (Open Data-Base Connection) based database interface is under development, which should allow easier access to pre-existing databases. But for now, trade entry is a bit cumbersome.

VAR Calculations: The current version of TARgA supports the JP Morgan RiskMetrics methodology - and that's all. However, you can, for your own purposes, modify VAR data quite easily once it's been downloaded. The calculations appeared to be accurate, and the time it took to process them was reasonable. I also thought that one of the nicer features of the Risk Toolset was how easy it was to slice and dice your portfolio any way you want using the Library feature.

Overall, I find the product very attractive. The biggest plus is its low price coupled with the ability to handle complex instruments. Many users will also like this system because it does not require an extensive hardware setup. For all users, the system can provide an excellent medium for deal reference, verification and benchmarking. By combining risk management basics with sophisticated front-office technology, Price Waterhouse and Theoretics have built a winner.

Quentin Storrs-Fox
Pisk manager, American Express

TARgA is very easy to use, because it is designed with both spreadsheet and Windows users in mind. The deal input screens, for example, look like very cleanly designed Excel spreadsheets. And when you select the type of instrument you would like to input, a correctly formatted "spreadsheet" immediately appears. Also, in many instances it is possible to use the mouse to "point and click" for various functions and listings. Thus, deal input is quite straightforward.

Deals entered into the Risk ToolSet must be organized by portfolio. What constitutes a "portfolio," however, is very flexible. You can have as many portfolios as you want, including portfolios made up of hypothetical deals. Furthermore, the ToolSet's Library feature makes it possible to aggregate portfolios, allowing portfolios to hold specific information such as, currency, counterparty, instrument, etc. Given such flexibility, users must design their own controls for ensuring that the information is accurate and that trades are assigned to the correct portfolios.

The system provides calculations for all 22 currencies supported by RiskMetrics, and includes a variety of standard reports. For currencies that do not fall within the RiskMetrics list, such as the Thai baht, the Indonesian rupiah, etc., we use the ToolSet's Excel export feature to combine ToolSet data with data from other sources in an Excel spreadsheet, where we run risk reports specifically for instruments containing "exotic" currencies. The inability to add other currencies directly to ToolSet is a limiting factor for international business.

When the Risk ToolSet is fully integretated with Theoretics, we believe the combined system will be much stronger. In particular, the Theoretics system will bring sophisticated pricing tools and analytics, and the ability to process complex instruments together with the ToolSet's basic risk management tools. The integration with Theoretics will allow the ToolSet to handle more than simple plain vanilla instruments.

Because Theoretics is written for Excel, it blends in very well with the spreadsheet-like ToolSet, and, unlike many packages on the market today, hardware requirements are minimal.

In summary, the combination of the Risk ToolSet with Theoretics promises to be a powerful one. In particular, this system is well suited to small banks, corporate users and to any financial institution just beginning to learn about risk management. With a sticker price under $50,000, this system provides great value for the money; it is a low risk-high return starter kit for risk managers.

Greg Forkin
Drector of Risk Management, General Motors Mortgage Corp.

Although we have been using Theoretics for some time, our firm has only been using the Risk ToolSet/Theoretics system for two months, but so far we are pleased. In particular, we are impressed with the breadth of models offered by the Theoretics piece of the system. Not only does it contain a wide variety of sophisticated models, but these models are not "black boxed." Therefore, we know exactly how our different instruments are being priced.

The ToolSet part of the system is also quite useful because it brings the RiskMetrics side of the deal to the table, and gives us the opportuntiy to perform "what if" analysis on our portfolio. So far, we have been testing this function for two months and have had no problems downloading the RiskMetrics data sets.

From a reporting perspective, we are pleased with both systems. Because neither is a closed system, it is possible to introduce flexible, Excel-based reports into either system.

The two biggest downsides to the ToolSet/Theoretics system - database limitations and simultaneously updating both ToolSet and Theoretics with new deals - will be resolved by future enhancements. We are particularly optimistic about the upcoming, full integration between the ToolSet and Theoretics modules. Specifically, we want to be able to update ToolSet portfolios with the complex instruments entered into Theoretics more easily. While right now this is possible, the process is quite cumbersome and requires breaking down instruments into their component cash flows and manually entering them into the ToolSet. Another mission-critical system update we are looking towards is a conversion from the ToolSet's proprietary database to Microsoft Access. So far, we haven't been able to add all our deals into the system because of this limitation.

Still, we are confident that both enhancements will take place in a timely fashion because both Price Waterhouse and Theoretics have, to date, been consicientious about supporting the product and providing new releases on schedule.

Certainly, the ToolSet/Theoretics combo is a cost-effective alternative. Indeed, price was a very important consideration in our decision to purchase the system. Other deciding factors included Theoretics' comprehensive library of models, particularly known swap, cap and floor models, and the fact that Theoretics opened their system to prove that established models were, in fact, being used and mathematically verified.

The Risk ToolSet

Risk ToolSet users enter the terms of standard trades into spreadsheets appropriate for the asset-type; there are also extra fields for the user's own notes. Users of exotic instruments can use the Theoretics spreadsheet to post trades, cash flows and curves to Risk ToolSet.

The user then goes into CompuServe to pull down RiskMetrics' rate, volatility and correlation data (there is no direct interface with the Internet, on which RiskMetrics is also available). The software will display the RiskMetrics data, and allows users to edit it, if, for instance, they want to enter their own volatility assumptions.

Users can get a VAR figure for the portfolio as a whole with the click of a button. Users can also break down their portfolio's risk into interest rate, currency or equity buckets, with the correlation effects across markets and instruments taken into account.

Interest rate and commodity risk can be analyzed on a maturity point basis, for example, to determine how much is at the three-month or two-year point. Equity risk can be broken down by size of position; currency risk by size per currency.

Users can run predefined position, cash flow and VAR reports, display them as graphs and save into an Excel file for greater flexibility in reporting and data presentation. They can also choose the currency in which to express results, the number of standard deviations and the holding period for the risk calculation.

Although PW's original target customers were corporate treasurers, most of the 86 initial customers (as of mid-August) have been regional banks with substantial trading desks that are not prepared to design mammoth systems. Many want to generate VAR reports to use in calculating regulatory capital, rather than go the more cumbersome - and capital intensive - standard measure. A few treasury and audit departments at big name corporations and money managers have done the same, according to Ann Rodriquez, product director at Price Waterhouse.

Theoretics

The Theoretics system is capable of pricing a wide variety of derivatives structures and generating an equally wide number of discount and forecasting curves. It's also possible to make an infinite number of adjustments to the yield curve simultaneously. Using a choice of several models, the system calculates total cash flows, discounts those cash flows back to their net present value (NPV) and solves for the values that will equal that NPV.

Theoretics provides easy links to real-time market data; the system's greatest strength is its ability to quickly and accurately price complex instruments. The system calculates and displays an enormous variety of curves. In addition to the specific rate for the structure or investment being valued, Theoretics calculates and diplays the entire 30-year curve of swap prices. The system can run extremely detailed "what if" simulations.

A one-year lease of TARgA costs $50,000, which includes free customer support, updates and two and a half days of training on-site at Theoretics offices in Park City, Utah. (Business perk fans take note: Training sessions are held just 20 yards from ski lifts at Deer Valley and structured to allow a few ski runs each afternoon.) Right now, as part of TARgA's initial launch, you can lease two TARgA systems for $50,000. (Note: The Theoretics module can be purchased separately from TARgA, but ToolSet is sold only as part of the package.)

Minimum hardware requirements: TARgA requires a Pentium 90 mhz PC with at least 16 megabytes of RAM.