12.1 Motivation

Chapter 12

Implementing Value-at-Risk

12.1  Motivation

To be useful, a VaR measure must be implemented, perhaps with pencil and paper computations, but more commonly as software. In this chapter, we turn to the topic of implementing a VaR measure. The topic entails little or no math. Human capital and project management skills are important.

12.2  Preliminaries

A large VaR implementation can be a multi-million dollar technology initiative. Technology initiatives sometimes fail, and the potential for your VaR implementation to fail should be a sobering motivator for going slowly, gaining commitment, involving the right people, and meticulous planning.

12.2.1 Go Slowly

Implementing a large-scale VaR system is likely to take eighteen months to three years. Integrating it with other systems, such as a deal capture system or trade management system, will extend the time frame. The more interfaces that must be built, the longer the implementation time. Internally developing a system, as opposed to purchasing a vendor system off the shelf, may add more time.

Once the system has been installed, it needs to be tested. Bugs need to be fixed. Employees need to be trained. If the system is replacing an older system, it is a good idea to run both systems in parallel for a while.

It is important to manage expectations. Lay out a clear time-line at the onset, and include provisions for additional time, as events may dictate. If the implementation team commits to an overly aggressive schedule, they will feel pressure to cut corners when things fall behind.

12.2.2 Commitment

A large VaR system cannot be implemented without commitment from the highest levels within a firm. Not only may it require a substantial budget, but professionals will have to be diverted from other work to contribute to the effort. Also, it is possible the implementation, or aspects of the implementation, may be challenged by front-office personnel or others whose work may be impacted by the new VaR measure. Addressing such challenges requires political capital that can come only from the highest levels of the organization.

12.2.3 Implementation Team

Planning and implementing a VaR system should be managed by a team of finance and information technology (IT) professionals headed by an experienced project manager. Collectively, team members should have many years of experience with trading, risk management and information technology. Finance professionals should have strong quantitative skills and be fully versed in the mathematics of VaR—i.e. they should have read this book. The team should also include end-users and front-office personnel who will be impacted by the system. Not only will they contribute valuable skills and experience, but their active involvement will help anticipate or avoid political roadblocks.

IT professionals should optimally have prior experience implementing software in a finance or trading environment. Still, in many cases, they will have little or no prior experience with VaR systems. It is important to take time prior to the implementation to train IT professionals in the practical workings of a VaR system. This up-front training should include real-life examples illustrating the mathematics and how the system will be used in practice.

VaR systems are often implemented as part of a larger initiative to implement other front-, middle- and/or back-office software. That larger initiative will have its own implementation team which will likely serve as the implementation team for the VaR system. However, if that team dos not include individuals with expertise in VaR, they should include additional participants with that expertise when making decisions relating specifically to the VaR system.