Asset Liability Management (ALM)
In order to continuously monitor the present and future risks associated with a financial institution’s obligations, it is imperative that a robust ALM framework is in place. It must incorporate the results of new strategies and products, and be able to attach price tags to risks taken - acting as a tool that continually reappraises the cost of risk as new information comes to light.
A strong ALM framework can allow proactive risk management and help determine what actions need to be taken to mitigate them. The right technology can help the function of ALM reach its strategic potential by acting as an ‘early warning system’. Ultimately, a firm should be able to understand exactly and simultaneously how a particular position or product contributes to its overall risk, and properly manage the interplay of different risks, thus giving a clear vision of its risk landscape.
The ALM solution provides financial institutions with the tools to monitor how different risks combine and affect each other. With Wolters Kluwer Financial Services’ ALM solution, firms can understand the risks being run across the organization as a whole; risk functions can be coordinated through a single management structure including trading floor and credit risk, treasury risk and elements of the middle office, and also regulatory reporting and internal audit.
FRSGlobal’s ALM solution functionality
- Sensitivity gap analysis enables user defined bucketing of sensitivity cash flows
- Tenor gap analysis splits the sensitivity cash flows on defined tenors in a way that the original sensitivity is preserved
- Price shift analysis allows definition and analysis of the impact of stressed risk factor prices on value at any level
- Volatility shift analysis allows definition and analysis of the impact of stressed volatilities on value
- VaR parametric based on the RiskMetrics™ matrix structure
- VaR Monte Carlo based on Monte Carlo simulated market price distributions
- VaR historical simulation based on historical market price and volatility observations
- Backtesting of VaR based on hypothetical and/or observed price changes of contracts.
Dynamic simulation (What-if analysis)
- Market price/risk factor evolutions based on deterministic delta value evolution or configured as a deterministic scenario
- Business strategies defined per entity, business line or product and include growth strategy, instrument-mix and spreads/ pricing
- Behavioral simulations defined per entity, business line or product. Including prepayment and drawing behaviour of customers/counterparties
- Roll-overs/reinvestments define how existing business which matures during any step of the simulation is rolled-over
- Ability to calculate the potential to lose income, and to value it in a dynamically modeled balance sheet and market environment
- Full flexibility in assessing treasury portfolios using all of the above mentioned analysis methods including the assignment of opportunity rates.
- The rate assignment incorporates advanced methodologies such as the par rate method taking into account for example amortizations and capitalization
For more information on how Wolters Kluwer Financial Services can help, please contact us.