Bank of America's new corporate risk management division is scaling up its credit risk management capabilities in the wake of its merger with NationsBank and recent global markets volatility. The operation, centralized in San Francisco and Chicago, will upgrade its risk systems and models to the high-end Sun workstation platform in order to address the increased systems demands brought about by the merger. The division plans to develop and build the technology in-house, citing the scant supply of robust products currently on the market.

BankAmerica is staying with UNIX because it believes it is more robust than the Windows NT platform, according to Mario Konrad, vice president of risk management information at BankAmerica. “That becomes an important issue as we look to enhance our assessment tools to handle a greater number of instruments and transactions.” Before the merger, the bank had planned to migrate its risk systems to the Windows NT platform, primarily for reasons of cost, says Konrad.

The decision to build a system in-house is based on negative experiences with vendor technology. The bank had earlier attempted to use Reuters' Sailfish product to calculate risk measures such as value-at-risk across various instruments. Konrad says Sailfish performance fell short of expectations after reaching a certain trading volume during testing in BankAmerica's European offices. Reuters declined to respond to this assertion. A source at Sailfish, however, argued that the application had successfully completed acceptance tests at Bank of America in London.

The move to high-end Sun workstations builds on the bank's previous approach to credit risk management. In addition, UNIX is the preferred platform of the NationsBank risk management group in Chicago. The bank's credit risk for traded products system (CRT) and the market risk for traded products database (TPD) operate off Sun Sparc servers using C and Unix Solaris operating systems in conjunction with Sybase databases. The TPD captures all transaction details from trading desks; netting agreements for all counterparties; market rates and statistics, including volatilities and correlations; and counterparty credit ratings and default probability factors. Later this year, the CRT and TPD systems will be enhanced to update three times a day to produce timely end-of-day results for Asia, Europe and the United States.

One system, the Trading Credit Risk Information System (TCRIS), is currently a total Windows NT client/server solution. The client receives end-of-day credit exposure by counterparty, which is stored on a Sybase database server. TCRIS supports about 1,500 end-users—credit officers, traders and risk managers—who access the system from their Windows workstations. Five developers are using Visual Basic 6 and rapid application development techniques in the ongoing development of the system. About 25 heavy end-users beta-test new releases.

Credit risk policies will be unaffected by the new technology plans. The bank calculates presettlement credit exposures for every over-the-counter derivatives contract at predefined dates until maturity, compiles aggregate counterparty profiles using Monte Carlo techniques, and captures the effects of portfolio diversification and netting. The bank stops short of a black-box solution for measuring credit risk, however.

To manage credit risks, Bank of America's credit officers review their counterparties' presettlement exposures regularly, using online systems such as TCRIS. “We believe our credit officers are best qualified to comment on the likelihood of the counterparty defaulting,” says Konrad. “They know what the counterparty's entire portfolio for on- and off-balance-sheet products looks like. Credit officials also participate in the process of setting limits and approving certain transactions.” Thus far, however, the bank has made no attempts to integrate market and credit risk systems further. “Our size and scope would make any comprehensive solution impractical,” notes Konrad.

New Functionality for C-ATS/MKIRisk

When Midas-Kapiti International acquired C-ATS Software in January for $60 million, there was no dearth of speculation about how the company would integrate its data management and credit limits management tools with C-ATS's enterprise-wide credit and market risk management functionality. Now, officials at the newly renamed MKIRisk have announced a number of new enhancements to their flagship Carma product as well as new features that take advantage of links to their new corporate parent. “Both C-ATS and Midas-Kapiti have found that risk technology buyers want risk measurement systems that are well-integrated with the limits system. Without a seamless linkage, there is no way to effectively calculate and manage credit risk,” says Rod Beckstrom, founder of C-ATS and chairman of MKIRisk. C-ATS and Midas-Kapiti users will now be able to track limits across both the front and middle office, instead of only one or the other. The most important enhancements to Carma, however, give users a new way of integrating credit and market risks into a price-risk system. The newest version includes a “view tree sets” feature, which allows users to choose from a list of market and credit risk factors—such as interest rates, foreign exchange rates and credit spreads—in customizing their risk analysis. Carma then runs all factors through a single Monte Carlo process. Running Monte Carlo analysis only once on different types of risk promises to reduce data-crunching time and allow for intraday risk analysis. Other systems typically run Monte Carlo analyses separately in order to calculate market and credit risk. “We believe that Carma is the only commercially available enterprise-risk-management system that does this,” says Jeff Mantel, director of product management at MKIRisk. “This has massive performance and work-flow implications.” The new version also promises new functionality in credit risk. Carma can now measure credit exposures by simulating all relevant market rates and prices at each time node along each path or scenario, analyzed with the time horizon chosen by the user. The new version of Carma also makes use of netting as a key factor in minimizing credit exposures. The user can calculate credit exposures using an “actual exposure” setting that accounts for implemented netting agreements. A “gross exposures” setting calculates credit exposures as if there were no netting agreements, and “net exposure” calculates credit exposures as if all trades are nettable. MKIRisk is eyeing the tremendous growth projected for the credit risk management market. A recent Meridien Research report indicated that the market for credit risk systems will grow from an estimated $512 million in 1998 to an estimated $1.4 billion in 2003. The driving force, according to Meridien, is the need for more accurate credit analysis methodologies that will help free up exhausted counterparty credit limits. MKIRisk officials note that their system will be further enhanced with new interfaces being built into the derivatives processing technology developed by sister company Summit Systems.

Product Purchases
End-user	Product	Comments
Chase Manhattan Bank	FNX/Sierra back-office and general ledger system	Processes 2,000 trades per day and links information to accounting system.
Deutsche Financial Services	Kamakura Corp.'s KRM suite of products	KRM-yc (yield-curve smoothing); KRM-mv (option-adjusted market valuation); KRM-var (stochastic value-at-risk).
Republic National Bank	NetRisk's RiskOps	Measures and manages enterprise-wide operational risk.
Putnam Investments	Barra's RedPoint risk management software	Portfolio data aggregator for use in benchmark analysis.
Alliances
Companies	Details
ISI-Dentsu and Braid	ISI, a Japanese consultancy and systems integrator, will market Braid's middleware products to help financial institutions minimize operational risk. Braid products include Gemini, a generic matching and reconciliation tool; Nimbus, a liquidity and collateral management system; and Freeway, an information-management application.
First Derivatives and Kx Systems	First Derivatives will market Kx Systems' products in Europe. Products include Kdb, a data warehouse manager, and K, a development platform.
Monis Software and Intel	Intel has taken a minority investment in Monis. Intel will provide engineering and technical support to assist Monis in optimizing Monis applications for Intel processors.
Netrisk and Intex Solutions	NetRisk will incorporate its ABS, MBS, CMO and CMBS pricing and risk management pricing technology into Intex's Risk-in-Time market and credit risk management system.
Triple Point Technology and Saladin	Triple Point's Tempest 2000 energy trading system will be linked with Saladin's Energy Server market data repository.
Infinity and Jaeger & Partner Asset & Liability Management	Infinity purchased Jaeger to provide risk management consulting and advisory services for financial trading, risk management and operations.

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