Intraday risk has once again become a major news topic due to the rise of the zero-day-to-expiry option (0DTE) market. This development raises several issues, including the level of margin calls that clearing houses must demand from their members and the discovery of unauthorized trades on these instruments. Still, intraday risk management remains a bone of contention between the Front Office, the Risk department, and regulators.

From EOD (End of Day) to Intraday risk

To fully understand the challenges of intraday, let's first look at the monitoring of EOD risks.

The EOD process in financial institutions is mature and comprises the following stages:

• Production of risk metrics as soon as the market closes
• Certification of these metrics by Risk, Finance, or IT departments
• Distribution of these metrics to Front Office and Risk teams
• Analysis of limit overruns by Risk teams in T+1

With, in case of excess:

• Remedial actions to return to authorized limits
• Approval of temporary limits
• Possible sanctions for traders responsible for these excesses

A "mature process" does not mean that it is fluid, particularly when it comes to the production, explainability, and certification of metrics.

It is worth noting that this process remains sequential and standardized over time: metrics are generally produced at the end of the day, including all the day's transactions.

For intraday risk monitoring especially by the second line of defense, the process is not uniform and raises a number of questions:

• What is the target frequency of these analyses: hours, minutes, or what’s the ultimate goal of continuous risk analysis?
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• How can we be sure that trades are complete at the time the risk analysis is carried out? For example, if a trade and its hedge are not present in the systems at the same time, a limit overrun may be reported, but this is not necessarily the case. There are many reasons for possible desynchronization:
  • Input into booking systems with deadlines specific to the nature of each instrument (information to be completed for structured products, new listed instruments whose characteristics have not yet been parameterized at the time of the trade ...).
  • Shift in hedge execution (block search, specific algos)
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• Which metrics make sense for intraday tracking? The idea is to avoid significant risk-taking during the day, which would only be discovered the following day in end of day reports. We therefore need to define a limited number of "specific" indicators to monitor at desk level.  

Front Office desks must absolutely control their risks throughout the day; they often have their own risk analysis tools which take into account trades not necessarily booked in “real time” inthe "official" systems.

So how do we control these metrics?

1. One solution is to leave this responsibility to the desk managers during the day, as they have access to their traders' tools and can react accordingly. This approach is unsatisfactory, however, as there is no independence from the Front Office.
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2. Another possibility would be for the risk department to replicate the end of day process on these indicators:
   • Run batches at the desired frequency
   • Analyze overruns
   • Ask the Front Office for explanations for these overruns

These overruns can be "false positives", and their explanation requires considerable energy from both the Front Office and Risk sides, which is incompatible with traders' time constraints. On the other hand, with the help of high-performance tools, these reports could be analyzed in T+1, revealing potential overruns, which would certainly be useful for sanctions, but insufficient to protect against a loss linked to an overrun during the day.

A mixed solution would be to maintain independent intraday monitoring by giving risk departments access to traders' tools (e.g. a replication of their screens). This is undoubtedly the solution that would make the most sense for combining independent monitoring and reaction capability. However, it also has its drawbacks: on the one hand, it relies on Front Office tools such as Excel, and on the other, on the risk officer's ability to carry out this type of monitoring in addition to their usual tasks.

Leveraging Opensee for Intraday Risk Management

Opensee is already used by numerous financial institutions on both the sell-side and buy-side for end of day risk analysis. Its value add includes:

• Complete scalability in terms of storage
• An integrated Python framework
• The ability to make adjustments while keeping all audit trails
• AI tools for analyzing metrics

Whatever options you choose for setting up intraday risk monitoring, Opensee can respond, as it has for several G-SIBS, large asset managers, and hedge funds. Opensee delivers:

• Full scalability to store granular data needed to build indicators at any required frequency
• Access to data combined with native AI tools to analyze overruns and distinguish between real overruns and false positives.

The main difficulty in setting up an intraday tracking system is defining its objective and governance. It must be pragmatic and consistent with the human and technological resources that the financial institution is willing to devote. A solution like Opensee can significantly add value, helping to navigate the complexities of intraday risk management.