Value at Risk (VaR) – Absolute or Relative 

Arkus will compute the portfolio VaR and conditional VaR over various holding periods (e.g. one day or one month) and at the desired confidence interval, perform VaR back-testing and provide incremental VaR figures at single position level. The risk metrics are calculated via a statistical factor model that uses a full revaluation approach within a Monte Carlo simulation framework. Linear volatility and its decomposition are also available. Leverage calculated according to the Sum of Notional approach will be provided in conjunction with the VaR results.

If required, Arkus will make suggestions for asset mappings or setups. An asset mapping summary report as well as a summary of the proxied assets (if any) is provided each time a risk report is delivered. All asset-level risk metrics are accessible and available in RiskRadar™.

In terms of structured products, Arkus has an extensive library of pricing functions for derivative products which can be deployed for risk modelling if sufficient underlying data is available. We also have the possibility to model non-linear derivatives on composite assets by including multiple underlying instruments. This, for example, would enable to capture optionality on bespoke indices or baskets of assets. In case none of the setups or the currently available pricing functions is able to provide an adequate fit, Arkus can code specific newly-created pricing functions for bespoke exotic products upon request.

Commitment Approach (Including Netting and Hedging Arrangements)

Another report Arkus provides is focusing on the second method available to measure Global Exposure (as per ESMA 10-788) i.e. leverage calculated according to the Commitment approach. This report uses the prescriptions provided in the ESMA 10-788 to calculate commitment on derivative positions and conversion to underlying exposure equivalent. It will include gross and net leverage figures as well as a breakdown of the contribution to leverage by each position. Furthermore, netting and hedging effects will be displayed.

Arkus provides a dedicated liquidity report developed upon a solid and transparent methodology that allows to screen for potential liquidity risks stemming from both the asset and the liability side of the monitored portfolio, either in current market conditions or under stressed scenarios and at different time horizons.

Asset side

Asset-level time to liquidation and cost of liquidation are assessed using multiple criteria (e.g. position size, traded volumes, maturity, stale prices, bid-ask spreads etc.) and the entire portfolio is allocated across eight liquidity classes. Our system allows the risk manager to overwrite the assignment of a certain position to a liquidity class based on asset-specific information. This process is followed through with an audit trail.

 Liability side

On the liability side, historical net redemptions patterns and investor concentration are analysed and used in stress testing. Our liquidity indicators contrast the liquidity breakdown of the asset side with the results of the liability analysis at matching time horizons in order to screen for potential liquidity shortfalls. This is done in multiple combinations of current and stressed market conditions of both sides.

Arkus counterparty report will show the exposures to counterparties resulting from deposits and/or PnL originating from OTC instruments. Gross and net exposures will be shown by counterparty.

Arkus concentration report will present the portfolio concentrations across several dimensions (e.g. asset type, ratings, issuers, duration, sector etc.). RiskRadar™ allows the user to dynamically choose on what basis concentration widgets are displayed i.e. gross, net or long-short.

This report will provide a breakdown of the currency exposures within the portfolio, distinguishing between exposures stemming from direct investments, derivatives and FX derivatives. It will also show those instruments that have hedging effects.

Arkus maintains an extensive library of stress scenarios applicable to your portfolio which include both univariate stresses (hypothetical) and multivariate stresses (hypothetical and historical). Position-level contribution to each scenario are accessible and downloadable from RiskRadar™. Furthermore, Arkus can also build customised stress tests by defining absolute, relative or volatility shifts for yield curves, currency pairs, equities and indices.

To conveniently monitor the Cover Rules, we have developed a portfolio-level guideline which is based on the Coverage Ratio. Any warning or breaching limit can be specified when the guideline is set up depending on the particularities of the portfolio. The warning level will act as a safeguard: if surpassed, it invites the addressee to verify the nature of the breach and potentially take corrective actions.