keeping warehouses up-to-date

One of the biggest problems with maintaining a data warehouse is adapting it to the continual flood of new products developed by the front office. Systems people managing the middle office will go to great lengths to create a standard data model and link it to a data warehouse, but when a new product comes down the pike, they often have to retool everything to get it into the system. The trickiest part is integrating the new product into the warehouse without compromising the continuity of historical data, which are so important for risk analysis and management.

Traditional data warehouses that use static or custom-built data models hard-wired to front-office systems often require modifications to the data storage to accommodate new instruments or trading systems. That can change historical information. New York-based Axiom Software Laboratories uses a dynamic approach that can readily adapt to new instruments and different models while maintaining consistent history, including original data and calculated results. "If you used one system developed a few years ago to do interest rate swaps, and then developed a new system, the two systems could have totally different data types, completely different structures and even different environments," explains Alex Tsigutkin, the company’s president and founder. "Nonetheless, you need the ongoing history of information for back-testing. That is difficult to do in the traditional data warehouse built into most risk management systems, because the warehouse employs a standard static data model built for a particular transactional and legacy system."

Axiom solves the problem through a product it calls Dynamic Data Warehouse, which includes virtual data mapping and dynamic data storage. The virtual data mapping is highly proprietary, so Axiom won’t discuss it in detail. It allows a firm to consolidate data sources — which can number more than 100 at a large firm — and administer the data elements of the warehouse.

For dynamic data storage, the Axiom system relies on a configurable server that can maintain multiple data models for both importing and retrieving data.

Unlike other systems, which run a single model and a single method of storage, therefore requiring extensive programming when any changes are made, Axiom builds flexibility into its system. Axiom gives its users administrative tools to adapt to new models and new transaction types, so banks can update their systems without maintaining a large staff of programmers. "In our concept, the middle office and data warehouse are dynamic enough to adapt to any changes in the underlying data coming from the front office, the back office and the market data sources," says Tsigutkin. "With the Dynamic Data Warehouse methodology, if you replace or modify a trading system, you don’t have to reprogram your warehouse and your analytical applications, because this is done automatically by the Dynamic Data Warehouse, which keeps multiple references to the same information."

Another associated problem is adapting risk management systems to a variety of different models. In many older systems, users are locked into a particular model for pricing certain instruments. The company has gone to great lengths to open up its risk monitor system so users can switch between a number of different, competing models developed by outside vendors, including Monis, FEA and others.

The same approach also allows firms to plug in different risk methodologies. Though most clients use value-at-risk, Axiom is able to structure its software specifically for the risk methodologies in use at the firm in question, including both market and credit risk, as well as consolidated firm-wide risk.

Links to outside information suppliers are particularly important in credit risk management. The firm works closely with both Standard and Poor’s and Moody’s to integrate credit data into its system. Users can also make use of JP Morgan’s CreditMetrics and Credit Suisse Financial Products’ CreditPlus as well as Axiom’s own proprietary credit risk methodology.

Another thorny adaptation facing software vendors involves updating their systems to allow users to meet the new reporting requirements of the Federal Reserve Bank and Financial Accounting Standards Board. The RiskMonitor system already has reporting functions in place for both institutions as well as the Bank for International Settlements and other European regulatory bodies.

For firms that don’t want to purchase risk management systems, Axiom offers outsourced risk processing. Axiom will download a client’s risk data, run the analytics and return the reports to the financial firm.

Accounting firms and software houses project substantial growth in outsourcing, primarily from corporations that don't have the in-house expertise and can’t justify the substantial investment required for sophisticated risk systems but still have to meet SEC and FASB requirements to value and report their derivatives holdings.

Fuji Bank’s New York office is using Axiom for both market and credit risk, and is integrating Axiom’s RiskMonitor and Dynamic Data Warehouse with its Devon back-office and other front-office systems. Other clients include Swiss Bank Corp., Bayerische Vereinsbank, Lehman Brothers, SBC Warburg Dillon Read and TransCanada Pipelines. The company says it is also marketing its software to energy and accounting firms and is expanding its sales presence in Asia. —T.G.

Reprinted with the permission from DERIVATIVES STRATEGY