IHS Markit soft launches more Risk Bureau capabilities ahead of Libor transition

IHS Markit is building out its Risk Bureau offering into a suite of applications aimed at helping the sell side manage processes such as forecasting, XVA calculations, and derivatives risk, ahead of the transition from the Libor benchmark at the end of 2021. 

Last spring, the data giant released its first Risk Bureau offering, a derivatives risk modeling service, aimed at helping buy-side firms calculate and model such risk using alternative data, machine learning, and cloud computing. The tool is designed to cut down the time it takes to run XVA calculations—credit valuation adjustments, funding valuation adjustments, collateral valuation adjustments, and capital valuation adjustments—with Monte Carlo simulations by 200% to 250%.

Now, the company is soft launching more apps under the Risk Bureau umbrella, including credit and equity forecasting utilities and new services called XVA Capital Hypercube, Risk-Free Rate Hypercube, and XVA Neural Net Pricer. These products will be free to use for about two months, after which IHS Markit will ask users to subscribe to the services either through its small starter plan or its enterprise-wide package.

While the credit and equity forecasting utilities are meant to be helpful to banks and asset managers, the other products are geared toward the sell side for now, says Mark Findlay, global head of financial risk analytics.

“When the sell side starts to adopt these new risk-free rates and phase out Libor, that’s when the buy side will say, ‘Now that that’s the tradable benchmark in the marketplace that’s taken hold, we want to know what the impact is for us; we want to know how our loans and our deals and our discounting is going to change’,” Findlay says.

The XVA Neural Net Pricer, scheduled to be made available by the end of April (the rest of the applications are already live), builds upon last year’s release, Findlay says. By again leveraging GPUs run on the AWS cloud and a neural network, the tool is designed to offer banks the ability to run thousands of simulations for an XVA path and spin up pricing in milliseconds. At first, it will work only for swaps and cross-currency swaps but won’t require complex implementations on the end-user’s part. Rather, users will be able to download the app via their desktop, mobile phone, or tablet, then load up a trade and run the calculations.

If salespeople on bank trading floors don’t have a great XVA solution, “they’re trying to work out what the XVA price will cost them in terms of the spread they need to enter the trade with. And unless they’re a Tier-1 bank, where they’ve got hundreds of millions of dollars to spend on an XVA solution over the years, they won’t have this capability,” Findlay says.

The Risk-Free Rate Hypercube tackles the Libor challenge from a different angle, Findlay says, by giving a view of fallback spreads arising from the benchmark’s retiring and adjusted different risk-free rate indexes—for example, the Secured Overnight Financing Rate (Sofr) in the US or the Sterling Overnight Index Average (Sonia) for Britain. Banks can use the tool to gauge implied fallback spreads given a specified Libor cessation date and explore market-to-market impact and change in delta for derivative products.

The forecasting utilities should allow users to pick any stock or index and project its outlook over a desired timeframe, as well as dig into its historical behavior. In a demo, Findlay uses IHS Markit’s own stock as an example, showing its downward dip at the start of the pandemic, and its outstanding lurch to almost $100 when the recent merger with S&P Global was announced. But the tool differs from a pure forecasting tool by allowing clients to set their own risk appetites. For instance, if a trader wants to invest in a stock, but is unwilling to lose more than 5% on that investment, the tool would re-plot the company’s outlook according to that parameter.

To take it a step further, Findlay and his team added another feature, which shows the probability of whether or not that risk appetite will be met and how often. As demonstrated by Findlay during the demo, with a 5% risk appetite, it’s likely that by January 23, 2022, that threshold will be met 46.2% of the time on IHS Markit’s stock. Users can also overlay those projections with alternative data to tell other stories, such as how certain stocks behaved when Covid cases spiked, or how Apple’s mobility data correlated with the behaviors of automotive stocks.

Lastly, the company is working on one more risk solution specifically for the buy side, which is scheduled to be released toward the end of the year. Though Findlay could not go into too much detail yet, it will deal with areas such as stress testing and counterparty risk, and offer insights into what happens with value-at-risk and expected shortfall. It will serve as a competitor to the likes of MSCI’s RiskMetrics and Axioma’s risk solutions.