Reuters To Take Over Day-To-Day Management Of Riskmetrics Data

Reuters will take over the day-to-day management of JP Morgan's pioneering Riskmetrics risk data service, as part of an agreement announced recently by the information vendor and the New York-based investment bank, reports FX Week's sister publication Risk Management Operations.

JP Morgan and Reuters also plan to develop Riskmetrics into a more sophisticated value-at-risk (VAR) analysis service. Users of the new Riskmetrics will be charged a fee, though the current version will remain freely available over the Internet.

The Riskmetrics deal is a significant coup for Reuters as financial data vendors vie for position in the growing market for volatility/correlation statistics. Since its launch 18 months ago, Riskmetrics has become the de facto industry standard for VAR data. So Reuters' close involvement with the service is likely to boost the information vendor's credibility in this sector of the market data industry.

Senior managers of leading derivatives and risk management software vendors that offer support for Riskmetrics have cautiously welcomed the move, saying it is likely to increase the quality and reliability of the service's volatility and correlation datasets.

The bank signed the deal with Reuters because it wanted to add new markets, increase the flexibility of the service and boost the product's data management capability, according to JP Morgan officials.

Jacques Longerstaey, JP Morgan's head of Riskmetrics, says the partnership with Reuters is a reaction to feedback from Riskmetrics users. The bank realized that it needed to add new markets and "be more flexible" as to how it delivered the service's volatility/correlation data, he says.

Another issue raised by clients was concern about the size of the Riskmetrics volatility/correlation matrix. Adding many new markets to the matrix would force it to grow "exponentially", says Longerstaey, which would compound existing computation problems that some users are facing.

JP Morgan needed to build a "customizable data engine where end-users could use all the Riskmetrics covariance calculations, but on the back of an underlying dataset," says Longerstaey. The investment bank could not give Riskmetrics users access to the underlying dataset for various reasons, he adds, one being that Riskmetrics relies on third-party data that the bank is not allowed to redistribute.

Moreover, Longerstaey argues that distributing underlying market data is "much more in the realm of business that a company like Reuters is in". He adds: "We thought it would be a good idea to bring a partner into Riskmetrics that had different strengths to JP Morgan and let each partner specialize in its own area of expertise."

JP Morgan and Reuters had been discussing their agreement for a few months, says Longerstaey. Under the terms of the deal, JP Morgan's responsibilities are to continue to expand the Riskmetrics methodology in terms of publishing an annual technical document and quarterly updates to that document. "Our responsibility is really the methodology side," says Longerstaey.

Reuters responsibilities include producing the data. "They will take over production of the Riskmetrics dataset as it is currently being distributed on the Internet. They will also build a new customizable data engine which will be distributed over the Reuters Web," says Longerstaey. These respective duties are closely intertwined, he adds: "Even on the data side, we will work closely with Reuters because you can't completely separate the data and the methodology."

Reuters' planned paid-for version of Riskmetrics will offer the user access to all underlying historical data, says Longerstaey. "Reuters will give you the flexibility to calculate your covariance matrices in a number of different ways," he says, adding that historical data access will also allow users to perform back testing and stress testing functions.

JP Morgan wants to add data on various emerging markets to the service. "We have some European markets to add, Southeast Asian markets to add, Latin American markets to add. The holes in Riskmetrics are pretty evident. We'll add those as we get more comfortable with the data that we get," he says.

Longerstaey says that the arrangement with Reuters will not change JP Morgan's IT structure much. "We'll still have access to the system that calculates Riskmetrics, even when it's in production at Reuters. We'll need it to do testing when we add new markets with Reuters and look at different methodologies for different markets," he says.

"We won't have the daily production requirements but we will continue to do quite a bit of work on the development side of the data, along with Reuters," he says. This causes no changes for JP Morgan's Riskmetrics staff, he adds.

JP Morgan and Reuters plan to form a committee made up equally of officials from both organizations, according to both Longerstaey and Reuters officials. Longerstaey himself will be one of the committee members, although he declines to say who the other members will be.

The committee will supervise development of new technology in terms of measurement and risk analysis, says Gabriel Bousbib, Reuters America's head of risk management. This information will be included in the quarterly documents which will outline the approach that Reuters and JP Morgan recommend to calculate risk data, he adds.

The differences between the original Riskmetrics and the planned one are threefold, says Bousbib. The extended coverage of markets and products in the new product will not be fully available on the Internet in the original product. The ability to have custom datasets downloaded from a workstation will also not be available on the free Internet version.

Also, by using the Reuters network, Riskmetrics data downloads will be "much more reliable," he says. This is in contrast to the Internet, which is "a fairly slow device because it's really overloaded," says Bousbib. Ironically, the Internet's limitations allow the existing Riskmetrics to continue to be free of charge, because Reuters doesn't view it as a threat. "It is our perception that for professional use, the Internet is not really the best medium," says Bousbib.

Riskmetrics' figures are currently produced daily by JP Morgan using internally generated data and posted onto the bank's Web site. They estimate the volatilities of, and correlations between, a variety of currencies, bonds, commodities and money market instruments.

Reuters plans to make the enhanced Riskmetrics dataset a part of its Project Armstrong relational database product, according to a Reuters spokesperson. The two-year old Armstrong project aims to consolidate the Reuters' various databases onto a parallel-processing supercomputer. In particular, Armstrong combines Reuters' real-time and historical market data. It forms the basis of the vendor's forthcoming 3000 series of data analysis products (FX Daily, May 18, published for Forex '96 in Frankfurt).

The spokesperson declines to comment on how fees for the new Riskmetrics would be distributed between Reuters and JP Morgan. "The commercial terms are considered a confidential matter between JP Morgan and Reuters," says the spokesperson.

In the meantime, the existing Riskmetrics service will remain a free service on the Internet and will receive further improvements. Moreover, the free Riskmetrics will remain in the public domain. In particular, other financial systems vendors will still be allowed to incorporate Riskmetrics into their products.