The financial crisis of 2008 made clear that neither government regulators nor enterprise risk managers of large financial institutions have the data and analytics required to understand the risks incurred by the financial system.
As the principal investigator (PI) of a major Alfred P. Sloan Foundation grant, Dr. Khaldoun Khashanah – distinguished service professor and director of the Financial Engineering program in Stevens’ School of Systems and Enterprises – is leading a multi-phase project focused on radically changing how the financial industry mitigates systemic risk, thereby preventing another Wall Street meltdown. Khashanah is collaborating with Willi Brammertz, adjunct lecturer of Economics at the University of Zurich and author of “Unified Financial Analysis: The Missing Links of Finance,” (Wiley & Sons, 2009), and Allan Mendelowitz, senior advisor at Deloitte Consulting. Stevens doctoral students are also contributing to the project as programmers and researchers.
Khashanah and his team are developing an open source financial instrument reference database called Algorithmic Contract Types Unified Standards (ACTUS) which standardizes financial contract data and enables accurate risk analysis. The database will represent virtually all financial contracts as algorithms that link changes in risk factors (i.e. market risk, credit risk, behavior, etc.) to cash flow obligations of financial contracts at extremely high levels of precision, speed and volume.
“This reference database will be the technological core of a future open source community that will maintain and evolve standardized financial contract representations,” said Khashanah. “It will result in making the financial markets more stable by revolutionizing every activity related to financial risk assessment at an enterprise level and a systemic level.”
During the first phase of the project, Khashanah will focus on programming and testing fixed rate contract types. Later phases will involve coding and testing more complex variable rate contract types, until 30 contract types are represented.
The open source environment, which will be hosted by Stevens, is intended for use within industry, government and academia – from bankers and traders to financial regulators and risk managers to finance faculty and students – to conduct financial industry research and test financial systemic risk.
“This is a public effort for the public good,” said Khashanah. “We understand the balance between supporting the public interest in introducing contract standards and the need to promote innovation in the financial marketplace.”
ACTUS will also provide a benchmark to launch new financial research.
“The contract types are like Lego pieces; if the contract you want isn’t represented you can change combinations to get a brand-new innovation,” said Khashanah.
In addition to the Sloan grant, the ACTUS project is being funded by Deloitte and other supporters.