Automated calculations for Regulated Capital Requirements (in Dutch: VEV), while staying fully in control.
The client’s need
Dutch pension funds must calculate their Regulatory Capital Requirement (RCR, or in Dutch: VEV) as part of the regulatory framework. Calculating the Capital Requirements is an intense calculation that requires stress testing (and thus valuating) all relevant individual assets and liabilities with exogenous, preset variables. To do so, the valuation of each instrument requires to be calculated with new input variables such as a shift in interest rates or a certain decline in equity markets.
While already being able to process and calculate the Capital Requirements, our client sought a way to make these calculations faster, while also maintaining a robust and accurate output. We are now able to calculate the VEV for them in under 1 minute per fund. Do you want to know how we did that? Read more about it below.
Our approach
Before we started building a new solution, we had to look at the current situation. Together with our client and external auditors, we analyzed their calculations, work processes, and data files. We noticed that there are a lot of manual steps, which affected the auditability, speed, and robustness of this complex process. The data was not centralized in one location but was scattered around multiple places. Also, the speed of calculating these calculations in their data solution was under par. This made the process difficult and very slow to calculate their Regulated Capital Requirements (VEV).
We started by slicing the software into three parts: the input, the calculation, and the output. We eliminated the susceptibility to error as much as possible by automating the complete calculation. This way, the client only had to provide the right input within Alloq.
After completing the software, we ran multiple backtests and side-by-side comparisons with the previous calculation method until the output was accurate and the same.
The result
The module that we built for Alloq became much more than just a ‘calculation tool’. It can make complete Capital Requirement calculations in Alloq within a matter of seconds, instead of multiple hours.
1. We minimized the manual proceedings, which reduced the risk of human error.
2. We built in the option to trace every calculation back to the deepest level. This way, our client was still fully in control, while still having automated processes.
3. We added a comparing view for the data which enables the user to validate the current outcome with previous quarters.
4. We also integrated the software with automated checks. Within the client page, it is now possible to view which datasets have been imported and which datasets you still need to import per quarter.
5. The Capital Requirement calculations can be downloaded as almost complete FTK reports, supporting items such as J502, K10X, and K20X
To put a cherry on top, our calculation software is completely transparent. By making the solution transparent from the top to the deepest level, it is praised by accountants and auditors for how easy it was to carry out the model validation.
Important! The data which is used in the pictures above is dummy data and does not represent the real data in any way.
