Risk Management Operations

Lehman Brothers implements risk data warehouse in NY

Lehman Brothers has established a risk management data warehouse in New York, based on software developed by Axiom Software Laboratories. The risk warehouse currently covers Lehman's New York trading activities, according to sources at the bank, but may later be extended worldwide.

Lehman is also using Axiom's front-end market risk analysis application, dubbed RiskMonitor. This analytics package is fully integrated with the data warehouse software, according to sources.

Maureen Miskovic, Lehman's recently hired global head of market risk management, declines to comment on the bank's risk warehouse initiative. But bank sources confirm that Lehman is now migrating its financial instruments onto the Axiom data warehouse on a product-by-product basis. These sources decline to name the instruments or time scales involved, however. Lehman's risk management division comprises some 14 or 15 people worldwide, say sources. These staff are distributed among three Lehman offices: New York, London and Tokyo. For now, the data warehouse is only being used in New York. Lehman sources say the investment bank is considering whether it should install the software in other sites, such as London and Tokyo. One source at the bank explains that Lehman decided to purchase a data warehouse to cache the position information it needs for risk analysis. This source adds that successful market risk management requires both quantitative and qualitative information - and a strong IT infrastructure is essential for the quantitative aspects of this methodology. "The most critical part of any risk management system is in collecting data together," says the source. "Without data, you either have an incomplete picture of the risk, or you have a misleading picture of risk."

Lehman started to bring the Axiom warehousing software on-line over the past six months say. The investment bank has also been educating its risk managers on how to analyze output from the new system. Sources add that Lehman and Axiom have worked together on tailoring the data warehouse software. These adjustments to the system allow Lehman to feed its own data and risk factors into the warehouse, says a source at the investment bank. Lehman populates the database with low-level transaction data such as trades, counter parties and positions. The warehouse is also fed daily with market prices and factors. The transaction information is tapped directly from Lehman's trading applications. Sources at Lehman say the investment bank relies mainly on internally developed trading systems. Lehman runs Axiom's financial data warehouse on a Ingres relational database. A Lehman source adds that the software is "open enough" to run on other database systems, such as Sybase or Oracle. "The data warehouse lets us take the lowest level transaction data from any system that we desire, normalize it and put into one place," comments one bank source. "This will allow us to do risk reporting across multiple products traded on multiple systems."

Sun platform

Lehman runs Axiom's RiskMonitor front-end on Sun Microsystems' Unix-based hardware. The system currently runs on Sun's older SunOS operating system, though the bank plans to upgrade to Sun's newer Solaris 2.5 Unix variant. RiskMonitor allows Lehman to define its portfolios in a variety of ways, enabling the bank to examine its market risks in aggregate form. A bank source says this covers all markets and all products - all the way down to an individual trader's position. On the analytics side, Lehman uses proprietary algorithms developed using Axiom's quantitative toolkit. Sources say the system's architecture allows the bank to plug in other analytic modules if it so wishes, such as JP Morgan's Riskmetrics.

Rival Systems

Lehman evaluated rival risk management software products before selecting Axiom Product. These systems included Reuters' Sailfish and Cats Software's Carma, according to sources at the bank. These sources add that Lehman's evaluation team judged Axiom could be up and running before its competitors. This was a key factor in the decision to take Axiom, says a Lehman source. Another point in Axiom's favor was the vendor's integration of its data warehouse with the Risk RiskMonitor front-end analytics application. "It was very nearly a complete system off-the-shelf," comments one Lehman source. Sources add that Axiom's market risk software came bundled with a regulatory reporting module, dubbed ControllerView. ControllerView provides financial controllers with reporting functionality for regulatory and capital adequacy purposes, along with other audit applications. Sources at Lehman say the bank does not currently use the compliance functionality in ControllerView, but may do so in the future. For now, Lehman relies on internally developed systems to handle such regulatory compliance and reporting duties. "We don't use Axiom for doing any external compliance or auditing" says one source. "That sort of reporting generally happens on a per business line basis," the source adds.

Position verification

However, Lehman does use a position monitoring module from ControllerView to verify the positions of each of its financial product lines. ControllerView could also help Lehman generate more consolidated reports showing aggregated views of risk across product lines, the source adds. Axiom Software Laboratories is a New York-based software vendor specializing in financial engineering and risk systems. As well as its data warehouse, RiskMonitor and ControllerView systems, the vendor has recently released an operational risk management application, dubbed ComplEye. Vendor officials say ComplEye allows surveillance managers and auditors to monitor trading activities in real time, with automatic enforcement of internal bank regulations and guidelines. Sources at Lehman say they aren't using ComplEye. These sources add that the bank relies on internally developed operational systems instead.