In Debut Of J.P. Morgan's Riskmetrics Service, Buy Side Labeled A Key Market To Lure

Dow Jones Telerate has become the first market data vendor to offer information from J.P. Morgan's recently released Riskmetrics risk analysis and data service--a product that a number of observers say will be of particular interest to institutional investment firms and money managers. The free-of-charge risk analysis and data service, which gauges market risk in 15 global bond, currency and equity markets, is also available on the Internet and H&R Block & Co.'s Compuserve online services.

A J.P. Morgan spokesperson says that Riskmetrics' most likely users are to be found at mid-sized commercial banks ("who need to estimate the market risk for their bond portfolios"), corporate treasurers ("for similar reasons") and in the investment management community.

Unlike banks, who would use the Riskmetrics service to handle valuation of their holdings, portfolio managers would use the system as a means of risk estimation, says the spokesperson. Regarding portfolio managers, the spokesperson says: "By using the volatility and correlation data, they'll be able to estimate how much risk they're taking, either in a single portfolio or across all of their portfolios."

J.P. Morgan, which introduced the service two weeks ago, has tried hard to position its risk exposure information as the benchmark by which banks, institutional investors and corporations will measure their risk exposure. Riskmetrics makes public J.P. Morgan's own daily estimates on volatilities in the selected markets, as well as correlations for over 300 instruments. The service also reveals the internally developed risk valuation algorithms with which J.P. Morgan calculates exposures in these markets. J.P. Morgan began publishing Riskmetrics Oct. 11, based on the previous day's market close; it is published daily by 10 a.m. Eastern Standard Time.

Though Riskmetrics is available in its entirety on the Internet and Compuserve, Telerate is for the time being displaying only a subset of the entire Riskmetrics database. It is available as pages 17379 through 17384 on the Telerate Digital Page Feed (TDPF). According to a Telerate spokesperson, the vendor aims to transmit Riskmetrics in its entirety next year, incorporating the service into its planned Microsoft Corp. Windows-based Telerate Workstation (TW) standalone terminal service.

Meanwhile, Reuters is also trying to get into the act, but as of yet has been unable to do so. The vendor has plans to post subsets of the Riskmetrics data via its Reuter Monitor service, according to a Reuters spokesperson. "We are working on a technical solution to deliver a subset," says the spokesperson. She declines to elaborate. Morgan's spokesperson declines to specify why Reuters was later to the mark.

John Matero, a J.P. Morgan bank associate in the market risk research department, headed the firm's efforts to put together a platform able to handle the computing the Riskmetrics service requires.

According to Matero, the Riskmetrics information will be new and useful to portfolio managers. "Portfolio optimization techniques," he says, "have been applied consistently in investment management for some time. But it is only recently that the methods for estimating portfolio risk have been extended to measure short-term trading risks taken either by banks, corporates or other market participants." This information is part of Riskmetrics, he says.

A number of portfolio managers seem optimistic about the J.P. Morgan product's release, but are waiting to see just how effective Riskmetrics is before praising it too enthusiastically.

For example, Adam Segal, a portfolio manager at Richmond, Tex.-based investment manager DLR Ltd., says: "If you can ascertain what your risk in a certain area is more accurately, you can build a more ideal portfolio in that country, and then using that with your other countries, you can build a more efficient overall portfolio. So it sounds good. But it'll have to be out there a while to see how good it really is."

A portfolio manager from the New York offices of IBJ Schroder Bank & Trust Co. echoes those sentiments. "It's a great idea. But I'm going to have to see more, see how much [data] it incorporates."

The J.P. Morgan spokesperson says that investment managers may "be more likely to have access to Telerate as opposed to [Compuserve and the Internet], which is why we're making it available on a number of platforms."

A J.P. Morgan official says: "Since it was hard to get initial feedback about what to put up on Telerate, we just took the liberty of offering what we thought people would be most interested in. It was nothing more scientific than that. But we're looking to see what people want."

Riskmetrics is posted daily on a J.P. Morgan server accessible through the Internet. Interested parties can also access Riskmetrics on the Compuserve Information Service from around the world, generally via a local phone call, according to the J.P. Morgan spokesperson.

A Telerate spokesperson says that the pages of Riskmetrics currently available via TDPF cover "a lot of different instruments--including equities, foreign exchange and others." The spokesperson says that the number of pages currently being displayed is "pretty much" what Telerate plans to display until such time as the TW is released early next year.

At that point, he says, Telerate users will have "the ability on the Telerate Workstation to access the complete Riskmetrics database and bring it into your terminal and then download it into other applications, such as spreadsheets." The spokesperson says that "there'll be no charge for that either. This is a big thing for Morgan, and for us. There's a lot of interest in this, particularly from portfolio managers and analysts."

The spokesperson says that Riskmetrics to a large degree utilizes information gathered internally at J.P. Morgan to make up the product's volatility and correlation reports. Information such as time series data for all the equity, forex and treasury data used in Riskmetrics comes from J.P. Morgan's internal prices and also from third-party data vendors such as Primark Corp.'s Datastream International Ltd.

The actual data in Riskmetrics includes the one-day and one-month volatilities of 120 government bonds, 180 money market instruments and swaps, 14 currencies and 14 equity indices. Additional information on commodities, mortgage-backed securities and other markets will be added to the list next year.

According to J.P. Morgan's Matero, the Riskmetrics systems group uses four Sun Microsystems Inc. Sparcstation 10s with 96 megabytes of memory each. The four Sparcstations--one of which is being used as a data server, with the rest serving as calculation engines--are linked via Ethernet local area network.

Nine vendors have signed deals with J.P. Morgan to develop commercial application software or services that make use of the Riskmetrics methodology and data sets. These are: Algorithmics Inc., Barra International Inc., C.ats Software Inc., Dow Jones Telerate, Financial Engineering Associates Inc., Price Waterhouse L.P., Quantec Ltd., Reuters' Sailfish Systems Inc. and Wall Street Systems Inc.

The J.P. Morgan spokesperson says that several additional software vendors have approached the firm about creating products that support Riskmetrics, both before and after its release. The spokesperson, however, declines to name these vendors until they provide J.P. Morgan with a release date and a detailed product description.

The spokesperson also says that other software vendors are free to develop their own systems that use the Riskmetrics product free of charge, provided that they inform J.P. Morgan that they are using the trademarked Riskmetrics name.

One point about Riskmetrics that industry sources have been focusing on is the fact that J.P. Morgan is giving it away for free. Industry speculation is mixed as to the firm's motives, but J.P. Morgan's strategy becomes at least a little less surprising when viewed in the context of the increasingly controversial over-the-counter derivatives market (Derivatives Engineering & Technology, Oct. 17). J.P. Morgan officials assert that by promoting the product, they are making the market safer for everyone--including J.P. Morgan.