grips-dkf-20110329 (2) - IDS GmbH - Analysis and Reporting Services

Thorsten Becker
Getting a GRIPS
Global Risk Parameters in Allianz Group
A post crisis shift of emphasis for market and risk data
Sponsored by Tullett Prebon Information
1. D-A-CH Kongress für Finanzinformationen 2011
Munich 5th April 2011

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The demand on market data after the Financial Crisis
The regulatory requirements for insurance and asset
management companies have increased in recent years;
for example:
Solvency 2 and usage of an internal risk model
Derivative directive (UCITS) for asset management
The financial crisis and the post-crisis structure of
financial markets add to this challenge and
escalate the demand for market data
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Observation 1:
Markets become more differentiated
- Example: ‘Pfandbriefmarkt’ after credit crisis
2.0%
1.5%
1.0%
Hypo-Real
Dexia
Euro-Hypo
Bayern -LB
LBBW
Spread Pfandbrief / Euro Swap
0.5%
0.0%
-0.5%
Source GRIPS / Bloomberg
Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
May-10
Jul-10
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Observation 2:
Prices are speculative
- During crises many sources, including OTC markets, provide
only indicative or speculative prices
1200
US CMBS AAA 5 Y ASSET SWAP
1000
800
600
400
200
0
01/2006
04/2006
07/2006
10/2006
01/2007
04/2007
07/2007
10/2007
01/2008
04/2008
07/2008
10/2008
01/2009
04/2009
07/2009
10/2009
01/2010
04/2010
07/2010
10/2010
01/2011
basis points
BNP Paribas warning
Lehman files for Chapter 11
Source GRIPS / Merrill Lynch
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Observation 3:
The EUR Crisis changes the structure of EUR Government curves
- Example: Government EUR Zero 2008 vs. 2011
18%
Government EUR Zero / 3rd March 2008 2011
16%
14%
12%
GR 2011 2008
PT PT 2011 2008
ES ES 2011 2008
FR FR 2011 2008
DE DE 2011 2008
10%
8%
6%
4%
2%
0%
5Y 10Y 15Y 20Y 25Y 30Y
Source GRIPS / Bloomberg
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Observation 4:
Some traditional classifications have no information value
- Example: EUR Credit Spread Curves Fin after credit crisis
7%
EUR Financial Credit Spread Curves
EUR-NONIBERIA-SPREAD-FIN#AA
6%
5%
EUR-NONIBERIA-SPREAD-FIN#A
EUR-IBERIA-SPREAD-FIN#AA
EUR-IBERIA-SPREAD-FIN#A
4%
3%
2%
1%
0%
Source GRIPS / Bloomberg
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
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We can summarize the market observations
in two main statements:
In the crisis, markets became much more differentiated
and ‘issuer specific’
After the crisis the spread levels do not return to the pre-crisis
level, but find a new more-or-less stable level. The universe of
interest rates becomes much more differentiated and complex
As a consequence, valuations based on only a few interest rate
curves per currency produce inaccurate pricing
and traditional and proxy solutions no longer work
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What are the challenges for market data solutions ?
As standard data providers do not support a sufficiently diverse
coverage, market data management is forced to build in-house
solutions and enhance the market data infrastructure
with the following components
Financial engineering knowhow for interest rate models
Methodology and calculation engines for term structure models
Capital markets expertise to administer, select the curve
benchmarks and ensure the quality
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How is Allianz IDS enhancing its market data
infrastructure with calculated market data?
In 2010, Allianz IDS started the GRIPS Project
(Global Risk Parameters) with the intention of establishing an
infrastructure for calculated market data
• To build up a financial library of algorithms for derived market data
• To establish a quality management framework and processes for
calculated market data to ensure best quality standards
• To implement a flexible framework to transform and upgrade derived
market data to the specific needs of end clients and down stream
systems
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To develop a substantial IR universe, many different
interest curve methodologies are needed
Requirements:
IR-Markets are very different in respect to
liquidity, number of available prices per curve,
homogeneity of curve benchmark members, etc.
End users of the curves have different
requirements: e.g. smooth curves for risk
purposes and more fineness for valuation,
extrapolation/ interpolation methods …
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
Source GRIPS / Bloomberg
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31
4.50%
4.00%
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
AAA
AA
A
Source GRIPS / Bloomberg
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31
Our experience :
Standard IR models are not functional in less
liquid markets
For less liquid markets GRIPS developed an
approach that models the spread curve above a
reference curve instead of the curve direct
Standard models need enhancement to be stable
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…this all adds up to a complex calculation framework…
General Parameters
Adjustments
Extrapolation / Interpolation Types
Curve Models
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…but a highly flexible one.
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In addition to this improvement,
Allianz IDS enrich the data sources
As an insurance / asset management company, Allianz has no
direct access to OTC front office data like an investment bank
which increases the valuation risk of OTC products
Allianz IDS has looked for an alternative to compensate this
disadvantage
Allianz IDS has decided to broaden the market data supplier
pool by the OTC data service of the leading inter-dealer broker
Tullett Prebon
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For Allianz IDS the collaboration with the
Tullett Prebon has significant advantages
Gives Allianz IDS direct access to independent and impartial
pricing across the full range of financial sectors and their related
derivative markets
Tullett Prebon has its own pricing team and offers the most
comprehensive coverage of the global OTC markets. This gives
Allianz IDS access to fully independent and non-position
influenced market pricing
In the case of discrepancies Allianz IDS has access to 24h
support and can clarify the quotes with the source
Especially in the case of market turbulences IDS does not
depend on anonymous, speculative prices
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Tullett Prebon Information
provides data for exotic markets
Coverage:
30,000 instruments on OTC derivatives markets
Over 42 countries
Independent and unbiased price
5.0%
SAR Swap Curve / 22.03.2011
4.5%
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
Source GRIPS / Tullett Prebon Information
1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y
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Tullett Prebon Information
provides data for exotic markets
- FX Options
MXN Swaption Volatilities 21.Mar.2011
- Inflation Swaps and
Options
- Interest Rates Swaps
- Non-Deliverable FX
Forwards and Swaps
- Capfloor Skews and
Surfaces
- Swaption Skews and
Surfaces
22
20
18
16
14
12
10
1M 2M 3M 6M 9M 1Y 2Y 3Y 4Y 5Y 7Y
Source GRIPS / Tullett Prebon Information
10Y
20Y
10Y
5Y
3Y
1Y
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Conclusion
The financial markets become much more
differentiated and complex
To enable an accurate valuation for risk and P/L an extensive
enlargement of the universe of interest rate curves is needed
To prepare for any future crisis a sophisticated and flexible
calculation tool box with access to reliable market data sources
is required
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GRIPS·Allianz Global Risk Parameters
powered by Cronus, the IDS Market Data Services Infrastructure
GRIPS+CRONUS
DRIVING THE INTELLIGENT USE OF MARKET DATA
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For further information please contact:
Thorsten Becker +49 89 3800 15137
thorsten.becker@ids.allianz.com
IDS GmbH – Analysis and Reporting Services
Königinstrasse 28
80802 Munich (Germany)
www.InvestmentDataServices.com
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