BLOG: How Data Management Helps Prepare for a "Grexit" Event

    What would happen if a "Grexit" is announced and how will this impact the data management activities of financial institutions?

    These days, executives in financial institutions cannot afford to focus solely on running a business under normal market conditions. They need to demonstrate to investors and regulators that they have systems able to cope with exceptional events.

    Whether Greece’s reform plan on Thursday can prevent Greece’s descent into total financial collapse may finally be revealed on Sunday when Europe Union leaders will meet for another emergency summit. Yet the scenario of a “Grexit” is not discarded, maybe only postponed, and most financial institutions are prepared for that.

    What will happen if a "Grexit" is announced and how will this impact the data management activities of financial institutions?

    Timeline of a "Grexit" scenario and its consequences

    First Days after “Grexit”: Unusual Market Moves

    Absorbing the avalanche of price exceptions

    If Greece defaults, the market will be hit right after the announcement, resulting in high volatility and large market moves in the first days. This will trigger an avalanche of alarms raised by pricing automation systems, due to the unusual variation of all asset prices, which break the STP (Straight-Through-Processing) chains.

    To absorb this avalanche of warnings, firms would be required to preemptively adjust their pricing systems by anticipating the volatility and modifying internal thresholds accordingly; but the exercise is almost impossible due to the unpredictable volatility resulting from such announcement.

    The only option is for firms to mobilize all their teams' capacity to control and validate manually the avalanche of suspect prices. But the more manual controls the higher the operational risks and the lower the transparency to auditors since there is little time to investigate and document all the decisions and still meet the deadlines.

    An ideal solution would allow adjusting the thresholds (aligned with market movement) and re-processing all suspect prices with the new settings. This method would allow closing a large amount of "trivial" price suspects (e.g. price variation is aligned with market movement) without manual intervention. This would provide more transparency in the audit logs, and more time remains for pricing analysts to investigate more complex exceptions.

    Few days after: Introduction of new currency

    Getting systems ready to receive paiments in new currency

    Contrary to popular understanding, a “Grexit” does not necessarily mean a new currency will be introduced. One definite alternative is that Greece will unilaterally default but remain within the Eurozone. What would however happen in the case of the introduction of a new currency?

    First, the announcement of the new currency will force firms to prepare all their systems to receive the payments in/from Greece in the new currency. Financial institutions have been preparing for this scenario for months, ready to update their systems, mainframes, transactional and portfolio management systems etc. Some firms have even setup workarounds to convert transactions from the new currency to EUR upfront before they impact core banking systems - to be ready right after the announcement, and possible engaging more IT resources once this scenario of a new currency is definitive.

    Secondly, a drop of the Euro will most likely follow the announcement of new currency by a few cents and hit Eurozone stocks, leading also to additional volumes in price exceptions.

    For the rest, while all 'old' bonds (especially EUROBONDS) issued in EUR will still be run in EUR, Greek banks would likely be forced to convert their Euro-denominated loans to New-Drachma-denominated loans.

      The adoption of the new currency would be only piecemeal. It could be possible that future dividends from Greek companies will be paid in this new currency and then it will be market driven.

        Few Months and Years After: Greece's Debt Restructuring

        Dealing with complex debt restructuring corporate actions events

        Even with developing a new currency (the “New Drachma”), managed by the Greek Central Bank, Greece’s public debt will not disappear.

        Argentina faced a similar situation when it defaulted in 2002 and began a process of debt restructuring in 2005 that allowed it to resume payment on the majority of the USD 82 billion in sovereign bonds that defaulted in 2002 at the depth of the worst economic crisis in the country's history.

        This time, investors will carefully watch the handling of repayment in the agreements to avoid the holdout problem of Argentina. Corporate actions announcements such as debt restructuring will be carefully scrutinized.

        What can be done?

        In a "Grexit" scenario, a data management system can help mitigate risk and provide the flexibility to adapt to new environments

        These days executives in financial institutions cannot afford to ignore proper risk management. They need to demonstrate to investors and regulators that they have systems able to cope with exceptional events.

        In a "Grexit" scenario, a data management solution can help mitigate risk and provide the flexibility to adapt to new environments:

        • More accurate identification of exposure to a country or to a specific issuer, across the enterprise
        • Very fast in adapting the systems with identified risks
        • Refocus human efforts and expertise on more complex and unpredictable effects
        • Reports and monitoring screens provide real-time insight of the processing flow, helping to identify peaks and reallocate resources to solve bottlenecks
        • Traceability of all actions and decisions taken

        Who's next?

        Financial markets may react negatively if Greece were indeed to leave the Eurozone, and analysts worry that contagion could spread to other European countries. In the Americas, Puerto Rico is already called "the Greece of the West Hemisphere", so this kind of Grexit is not a one time scenario - and firms equipped with a flexible data management solution are probably better prepared to react swiftly to this kind of crisis.

         

        Sources

         

        How can AIM Software help?

        GAIN Pricing Master for example provides the flexibility needed to easily change thresholds and various parameters to quickly react to big moves in the market.

        GAIN Entity Master is of course another business application which provides an immediate benefit in times of crisis: you can more accurately figure out your exposure to a country/region (e.g. Greece, Puerto Rico…) or to a specific issuer across your enterprise.

        GAIN SecMaster can give institutions the flexibility to identify potential problem areas (e.g. spitting out reports listing all the bonds issued by Puerto Rico, all the bonds that had a rating downgrade in the last 6 months…) but also enabling the firm to rapidly adapt reference data systems to new paradigms (e.g. a currency change if a country exits the EURO, new regulatory requirements).

        GAIN Corporate Actions DM helps firms to optimize the process of validating corporate actions announcement with two or more sources. While GAIN automates the validation of information for high volume events, it helps corporate actions teams to focus on the more complex events, helping then to quickly access the right information to compare and control it.

          Article posted by Olivier Kenji Mathurin on July 10, 2015

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