Risk management solution for margin lenders

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HNC Financial Solutions has announced its ProfitMax Margin Manager, based on a flexible client/server architecture, as a predictor of risk for brokerage accounts.

ProfitMax automatically predicts margin risk for equity, investment-grade debt, and mutual fund securities at the portfolio, account, and security levels.

In step with the bull market of recent years, the popularity of brokerage margin accounts has grown exponentially. According to Money magazine, margin debt on NYSE and Nasdaq stocks has increased 64% over the past year to an all-time high of $242 billion; that amount is up from about $35 billion a decade ago. While brokerages have enjoyed the profits presented by margin accounts, the decline in many stock prices this spring shows that stock volatility and over-aggressive investors present serious margin account risks to brokerages, including potentially steep financial losses and possible penalties handed down by the SEC.

HNC’s new offering analyzes individual securities, the expected volatility of securities at the account and portfolio level, the time horizon of concern, and the thresholds for a margin call, to report both the probability that a given account will get a margin call during a specified period, and the potential loss to the account in the event of a call. Armed with these predictions, margin lenders are able to monitor accounts the value of which threatens to fall below the margin loan amount.

According to Bruce Hansen, president of HNC Financial Solutions, “The SEC mandates that securities used as collateral for a margin loan must equal 50% or more of the value of the loan equity. Thus, margin lenders must constantly monitor the individual securities in each margin account and the risk of all margin accounts in their portfolios to ensure the value of their loans don’t drop below this level – not an easy task given the stock market’s frequent fluctuations.

“Our pilot studies show that, given typical market fluctuations, employing ProfitMax Margin Manager can reduce margin loan risk by 20 basis points off a total credit portfolio and increase back-office productivity by 30%.”

“The expansion of Internet retail trading has increased the financial risk to both individuals and their brokerage firms,” said Larry Tabb, group director at TowerGroup.

With ProfitMax Margin Manager, back-office teams are able, at the click of a mouse, to evaluate a portfolio’s overall or day-to-day risk and see how it would perform if the market should take a sudden downward turn. It lets users conduct custom analysis based on 40 market indices to create “what if” scenarios. The system can also identify the securities in a portfolio that are responsible for the account’s potential loss and analyze security concentration and liquidity to help identify exposure.

Headquartered in San Diego, California, HNC Software provides predictive software solutions for the financial, insurance, telecommunications, and e-commerce service industries.



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