By Tom Groenfeldt

Software vendors have always feared the day when risk management technology becomes so common and accepted that it will routinely be built into mainstream financial packages. That day seems to be just around the corner, at least when it comes to standard value-at-risk analysis.

Last month, PeopleSoft, a leading supplier of enterprise resource planning (ERP) systems for corporations, announced an agreement with Financial Engineering Associates to supply sophisticated risk management tools within its corporate treasury module.

PeopleSoft will embed FEA’s VaRlib software in order to deliver comprehensive VAR reporting within its treasury management system. The ERP supplier will also embed FEA’s analytics libraries to enhance the module’s derivatives pricing capabilities. ERP vendors hope that by offering standard risk management functions within increasingly sophisticated treasury systems, they will be able to expand quickly into the financial services sector. The major ERP vendors, including SAP, Baan, Oracle Financials and JD Edwards, have sold large, integrated systems that link accounting systems with manufacturing, transportation, supply and human resources to major industrial concerns such as automotive manufacturers, oil companies, computer firms and global chemical firms. Installation of a large system can cost up to $100 million and take several years to complete as corporations redesign their internal processes to meet the best practices imposed by the enterprise integration software package.

PeopleSoft and other enterprise resource-planning vendors are eager to offer standard risk management functions. Will this make data integration easier for their clients?

Many large corporations decided several years ago to replace outmoded computer systems with comprehensive ERP systems, leading to strong sales growth in the sector. This year, however, year 2000 problems have hit sales of large complex systems, and ERP vendors are busy exploring ways to sell to smaller companies and to new industries, including banking and insurance.

FEA’s modules will give PeopleSoft clients access to two major new functions. The first function, mark-to-market pricing for derivatives, is being driven by FASB rules. The second function, risk management and risk assessment by means of VAR modules, is designed to help corporations meet SEC disclosure requirements. Fulfilling SEC disclosure requirements with VAR numbers reveals less competitive information than does information on cash flows or price sensitivity to markets. “It accounts for all the co-movement and integrates the positions, but it doesn’t convey competitive information,” says Mark Garman, president of FEA. “It is also easier for investors to understand.”

Simpler solution

ERP vendors who elect to add risk management functions may have at least one big advantage over specialized risk management vendors: since financial data are already collected in their treasury systems, customers may not have to suffer through the expensive and time-consuming task of building custom data feeds to support risk management functions.

“Risk-adjusted performance measurement calculations require capturing enterprise-wide risk,” says Mark Sullivan, senior manager at KPMG. “It is probable that the ERP systems might eventually facilitate the aggregation. What PeopleSoft seems to be trying to do is penetrate that risk-adjusted performance measurement space.”

Will banks eventually replace Infinity and Algorithmics with ERP systems for risk management? Sullivan doesn’t think so. “In my opinion, PeopleSoft, SAP and Oracle are all aggressively attacking the banking industry, and no one has a complete solution yet. Oracle has some incumbency in the finance function outside the treasury, and PeopleSoft is in a lot of banks—but mostly in a human resources capacity.”

Sullivan notes that although ERP firms are trying to develop risk-adjusted measurements, they are thin on all fronts. “I’m not sure the ERP vendors will try to develop the core systems in treasury—the systems tend to be fairly complex and sometimes customized so the development might never pay off,” he says. “ERP solutions do not offer the same magic to banks as they do to manufacturers. Because the majority of a bank’s transactions take place on legacy systems, ERP vendors are forced to work within the confines of middleware solutions.”

In April, just a few months after JP Morgan spun off its risk management unit into the RiskMetrics Group, the new entity released a new product aimed at a long-overlooked set of risk managers—those in the corporate world. Like its famous big brother, RiskMetrics, CorporateMetrics is a package of definitions, methodologies and data sets used to measure market risk. But whereas RiskMetrics is designed to make sense out of the daily financial madness of bank trading operations, CorporateMetrics is geared toward the more serene, long-term-oriented corporate world.

The product, says RiskMetrics Group CEO Ethan Berman, “will be a new benchmark for corporate risk management. It will allow chief executives, chief financial officers and risk managers to better understand, manage and measure how much of their expected earnings are exposed to changing global financial markets.”

According to company literature, CorporateMetrics concentrates on two corporate financial results that affect, and that are commonly used to gauge, a company’s value—earnings and cash flow. The product enables companies to forecast the impact on financial results of a broad range of market variables, including foreign exchange rates, interest rates, commodity prices and equity prices.

In addition to providing value-at-risk calculations, CorporateMetrics generates forecasts for the long horizons typical of corporate planning and business management via RiskMetrics Group’s LongRun methodology—an integrated framework, including data and a suite of forecasting methodologies, for forecasting market rate distributions to measure market risk over long horizons.

CorporateMetrics includes a number of other risk measures, including earnings at risk, earnings-per-share at risk and cash flow at risk, as well data sets and methodologies for simulating market rates over long horizons (two to 24 months). An accompanying software package called CorporateManager is slated for release in the third quarter of this year.

Vendor	Product	Function
Algorithmics and FNX	Dedicated Interface	Provides automatic data mapping between Algorithmics’ RiskWatch and FNX’s Sierra System.
BARRA	Brazilian Equity Model	Monitors risk exposure for asset managers.
Infinity	Infinity G/L	Configurable general ledger to meet FAS 133 requirements; supports mark-to-market and various accrual methods.
MB Risk Management	MBRM 2-Factor Interest Rate Volatility Add-in	Universal add-in that automatically calibrates the Brace-Gatarek-Musiela model to price and manage the risk of interest rate derivatives.
Principia Partners	PAS/SLS	New sub-ledger component for FAS 133 compliance.
Savvysoft	SavvysoftCredit	Pricing and hedging credit derivatives.
SunGard Treasury Systems	ProFX	Integrated application to manage complex foreign exchange transactions, including spot transactions, swaps and options.
Xenomorph	XLLSpy	Converts proprietary Excel XLL add-ins to Microsoft COM libraries for use in Visual Basic, Visual C++ and Delphi.

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