Author: Jorrit de Jong

Automation of FTP process

Posted on by Jorrit de Jong

For a large Dutch bank we created a detailed plan plus working prototype to replace the manual daily funds transfer prices (FTP) for the mortgages domain process with an automate system.

The resulting prototype achieved automation using the windows scheduler, Visual Basic scripts and Excel (with macro code). This prototype was the first step to automate the process and greatly reduced the workload for the business team charged with producing the daily prices. From an IT perspective this first round of automation was not enough as the prototype model didn’t fulfill the straight through processing required by IT as it still requires manual steps. In the second phase of the project we investigated which steps can be taken to achieve straight through processing. We suggested to migrate the solution to a more technically robust environment using C#, SISS package and SQL-server.

Pipeline Option Residential Mortgages

Posted on by Jorrit de Jong

We were asked by a large Dutch bank to help model the pipeline option for their residential mortgage portfolio. We developed a model and implemented it in the bank's ALM software.

The pipeline of the mortgage portfolio consists of those mortgages that have been offered to clients, but not yet settled. Two groups of contracts exist: those with the option to pay the lower of the offer rate and the actual mortgage rate at the day of property transfer and those without. In both cases the client doesn’t need to wait till the end of the offer period before drawing funds. The timing of the funding needs of the client is considered to be independent of the option value. Other factors like delivery dates of the property and personal preferences are considered to dominate over economic considerations in this case. The choice was made to use historical client behavioral data to compute the probability of drawing funds at a certain period. This choice was made over considering new clients homo economicus and using option theory to calculate the economic value of this phenomenon.

Another factor we considered is the fact that the customer has the option not to accept the mortgage offer from the bank and seek funding elsewhere (i.e., not all offers convert to actual sales). We call this the acceptance option. Based on historical data the fraction of those offers that convert to sales are estimated for each period.

ALM Robot

Posted on by Jorrit de Jong

We were asked by a large Dutch bank to help with the automatic processing and testing of data. We used our Robot technology as part of the implementation.

Ugly Duckling has developed a number of products that help to process large amounts of data. We were asked by a Dutch bank’s Asset and Liability Management group to use this software to develop a prototype for a Robot that we code-named ‘Jan’.

Jan was able to monitor directories, mark up suspicious data, clean garbage data and, over time, monitor the quality of the data. The Robot Jan was able to do in 30 seconds what an analyst would take hours to do.

Debt Ridden Europe 1920

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In 1920 John Maynard Keynes wrote 'The Economic Consequences of the Peace' as a critique of the Paris Treaty which outlined the repayment plan for the damages done by the Axis during the First World War. Keynes pointed out that the damage claims were largely excessive and would bankrupt Germany within short order. Nevertheless debt ridden Europe looked to Germany for capital to rebuild their economies. The consequence was the inevitable collapse of the Reichsmark which drew the Weimar Republic in to the abyss with it. Some even argue that the economic collapse, and the consequent large scale poverty, put Germany with its back against the wall giving the Nazi party room to seize Power. Continue reading →

Testing & Finance 2012 : “Ford’s Lean”

Posted on by Jorrit de Jong

During our Testing & Finance 2012 talk we demonstrated how the concepts used by HROs can be used to manage the operational risks faced by modern financial institutions.

At financial institutions, the Chief Risk Officer’s primary concern is detecting and preventing catastrophes before they occur, i.e. managing risk. While financial risks are important, operational risks are becoming more so. Controlling these risks requires a new attitude to making changes, testing, releasing software and developing the right team. Continue reading →

Notes on High Reliability Organizations

Posted on by Jorrit de Jong

This article is based on research we did on High Reliability Organizations (HROs) for our Testing and Finance 2012 talk. It intended as a starting point for those interested in learning more about HROs. If nothing else, it provides an extended reference section for further reading and suggests some useful web resources.

What is an HRO?

HROS are organizations that succeed in avoiding catastrophes in an environment where accidents can be expected due to risk factors and the complexity of the system. Consider, for example, the organization behind oilrigs where it is easy to imagine someone getting injured due to a mistake. What starts out as a small mistake may quite literally explode into a big problem. As Tim Harford notes: Continue reading →

Square Law of Spreadsheets

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Ella places two printouts on John’s desk and points at the total columns. “Why don’t these numbers match?” she asks. John looks for a second, hoping Ella has made a simple mistake. But she’s right, they should match. John spends the rest of the day crawling through dozens of spreadsheets, attempting to find the source of the discrepancy. Eventually the problem is found, but only after turning up five or six similar issues. The team collectively pauses for breath when they consider the number of decisions made on faulty data. It is another week before John has fixed the problems and can return to his original task.

This is a particularly familiar story to many growing financial companies, which often prompts the question “how did things get like this?”. To find the answer, we need to investigate a misunderstood dynamic in spreadsheet and tool development. Consider the following diagram:

square_law

Figure 1 – The Square Law of Spreadsheets Effects Diagram. Continue reading →

Matlab Validation at Kempen & Co.

Posted on by Jorrit de Jong

In collaboration with Valu8, we acted for Kempen & Co in validating the valuation and hedging of the Inflation Breaker, a portfolio of ground lease contracts.

The contracts in the portfolio generate monthly cash flows based on the rent. Rents increase annually, with the Dutch pricing inflation index. At maturity of the contract, the tenant has the option, but not the obligation, to buy back the land.

This was not the first time Kempen & Co decided to entrust this validation to Valu8 and Ugly Duckling. This shows that Ugly Duckling is a key player in software, management and finance with an integrated approach that delivers. The work done was a continuation of previous validation work where we checked the cash flow model, the interest rate curve construction methodology and the inflation model. The previous implementation was improved and migrated to Matlab (previously Excel/VBA), which required a new validation.

Mortgages Integration Project at ABN AMRO

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We have been working on an integration project at ABN AMRO and their subsidiary ABN AMRO Hypotheken Groep. The project requires the migration of mortgages from an obsolete system to a Quantitative Risk Management (QRM) system.

To manage the project effectively we compiled a scenario for a successful migration, based on information gathered throughout the organization. As part of this process, we studied both the current process of funding the mortgage contracts and the process they to which they are migrating. This presented an opportunity to immerse ourselves the funding practices of banks and link these to implementation, i.e. proper engineering.

The migration requires a move from an existing funding methodology to the industry standard of Funds Transfer Pricing [1. see http://en.wikipedia.org/wiki/Funds_Transfer_Pricing for more details on FTP] (FTP). Implementing this needed a conversion methodology. After a literature search we suggested a methodology and implemented it. For the implementation we build a Microsoft Excel/VBA tool to do the relevant computations. Migration of the mortgage contract data from the old system required custom built SQL scripts in combination with the QRM Transaction Data Mart tool. Once the migration is complete all the mortgage information will be stored and processed in one place, reducing operation risk.

Executive Master of Actuarial Science (EMAS)

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We are delighted to be on the steering committee responsible for the Actuarial Association’s new Masters program: Executive Master of Actuarial Science (EMAS).

The Actuarial Association (Actuarieel Genootschap, AG) is the professional association of actuaries and actuarial specialists in the Netherlands, of which very nearly all actuaries are members. The AG has developed into a platform for actuaries to communicate among themselves and with society at large. The committee helps shape the content and context of the course. Managing risk is one of the central themes as is best described by quoting the course website:

The demand for skilled actuarial professionals is growing. Actuaries are the leading professionals in finding ways to manage risk, and managing risk requires knowledge of several disciplines. Understanding how businesses operate, how legislation may have an impact and how financial economics may affect securities are all vital skills for an actuary. Globalization, the integration of financial markets, changing IT environments and market innovation in risk management ensure that the actuary field of action is becoming more challenging and complex by the day.   In response to these changes, the Dutch Actuarial Institute (Actuarieel Instituut) and Tias Nimbas Business School (Tias Nimbas) have developed the Executive Master of Actuarial Science (EMAS).

- Taken from the executive master of actuarial science website

After being on the committee in the startup year we are happy to continue our engagement into the second year of the course.