Asset-Liability Management / Liability-Driven Investing

Managing a balance sheet with increasingly inter-related assets and liabilities is a challenge for Asset Liability Management (ALM) and Liability Driven Investment (LDI) strategies. Going beyond interest rate risk, managers are increasingly considering liquidity risk, credit risk, and other market risk forces - as well as their dependency structures. Sensitivity of net income and net economic value to market forces remain important measures of ALM/LDI, while income and expense simulation has enabled greater identification and management of inter-related risk factors.

Beyond portfolio and firm-specific risk limits, regulators are imposing their own limits which are further complicating ALM decision-making. The liquidity coverage ratio (LCR) being phased in by the Basel Committee on Banking Supervision is requiring banks to maintain a stock of high-quality liquid assets (HQLA) sufficient for 30 calendar days under stressed scenarios. ALM and LDI management requires a flexible, yet integrated, solution that can continue to meet evolving regulatory requirements that require cash-flow matching, sensitivity calculation, and robust scenario analysis.

ALM and LDI matching and hedging decisions are made easier with FINCAD's cash flow projection, flexible modeling, on-demand sensitivity analysis, and agile scenario analysis.

Cash-flow Matching

F3 Platform handles both vanilla and exotic contracts, so portfolios can be created and their cash flows managed without concern about the underlying instruments. Not only can the asset cash flows be viewed and analyzed, but the liability and surplus cash flows as well. All three types of cash flows can be viewed at the individual, portfolio, and / or enterprise level. At all levels, ALM can be performed on the risk or term bucket of your choice.

Flexibility to Handle Exotics

Whether modeling a simple annuity or a hedge with path dependency, F3 Platform's generic architecture provides flexibility to handle any trade regardless of size or complexity. This flexibility allows you to perform portfolio analysis under a variety of market scenarios and discounting methodologies, providing an adaptive framework for an evolving regulatory environment.

Sensitivity Analysis

Your ALM/LDI strategy can be actively and efficiently managed with our patented Universal Risk Technology™ (URT). URT provides near instantaneous, analytical, first-order sensitivities as well as hedging notionals. With sensitivity analysis powered by URT, accuracy is improved, and time to market is reduced by avoiding bumping.

Scenario Analysis

F3 Platform architecture offers an agile scenario analysis framework. New scenarios can be formed from previous scenario results to drill down into your risk drivers and enhance your LDI strategy. Prebuilt scenarios based on interest rates are available while still providing you the freedom to create customized scenarios. In addition, not only can customized scenarios be used, but user-specified buckets can be based on risk (such as inflation, interest rates, PV01, DV01, duration, and credit) as well as a variety of additional factors (such as sector, rating, country, or tenor). This provides a global comprehensive risk analysis as well as giving visibility into the performance and risk profile of a given portfolio manager.

From Granular to Aggregate

Advanced tagging mechanisms in F3 Platform provide easy access to both aggregate and granular-level reporting that is consistent across the enterprise. F3 Platform gives both trade and portfolio level information when performing scenario analysis, sensitivity analysis, and cash flow reporting on multi-asset, multi-currency portfolios.

Cash flow projection and ALM decision making is enhanced by near instantaneous analytical sensitivities powered by FINCAD's proprietary URT. Agile scenario analysis not only uncovers risks you want to hedge at the aggregate level, but also uncovers risk at the trade level; by feeding output from one scenario analysis into another scenario analysis, you can dig deeper to uncover your risk drivers. Additionally, with F3 Platform, all valuation and risk results are consistent across the enterprise.

Asset-Liability Management - FINCAD Solutions