Risk management for multi-asset portfolios is becoming increasingly complex with tightening derivatives and climate-related disclosures all posing new challenges to market participants and investors.
In response to these evolving needs, Bloomberg’s Multi-Asset Risk System (MARS) has introduced two significant enhancements: MARS Climate, a comprehensive solution for portfolio-level climate risk analysis, and expanded support for global derivatives portfolio risk exposure.MARS Climate
Bloomberg MARS Climate is designed to help financial institutions gauge the potential effects of climate change on their portfolios and overall risk profiles. This launch arrives against a backdrop of heightened regulatory expectations and economic studies highlighting the increasing costs of climate-related events. A recent Swiss Re report, for example, estimates that economic damages from natural catastrophes have doubled in real terms over the past two decades, reaching US$280 billion globally in 2023.
MARS Climate extends Bloomberg’s existing capabilities in physical and transition risk management, aiming to help firms assess and quantify climate-related risks and opportunities. The solution uses various integrated assessment models aligned with the Network for Greening Financial Systems (NGFS) framework, enabling transparent analysis under different climate scenarios.
The transition risk model leverages Bloomberg’s New Energy Finance’s (BNEF) Transition Risk Assessment Company Tool (TRACT), which gauges company revenue risk and potential gains by examining operations, supply chain exposure, and geographic footprints across multiple NGFS scenarios. Users receive detailed reports that break down the financial impact of climate risks—acute, chronic, and transition—down to the security level.“Portfolio and risk managers increasingly look to perform climate risk analysis alongside other financial risk assessments to manage risk and regulatory reporting. As we continue to expand our climate risk solutions across Bloomberg, the latest addition to our widely used risk management offering, MARS Climate, will enable users to assess portfolio vulnerabilities and opportunities related to climate change,” said Dharrini Bala Gadiyaram, Global Head of Risk Product at Bloomberg.
MARS Derivatives Risk Expansion
Earlier this month, Bloomberg reported an expansion of MARS to help clients navigate evolving global buyside derivatives risk mandates. SEC Rule 18f-4, first implemented in 2022, mandates a derivatives risk management program for funds, with strict limits on leverage risk measured through prescribed Value-at-Risk (VaR) calculations. Rule 18f-4 has impacted buy-side firms in several ways:
Derivatives Risk Management Program (DRMP): Funds exceeding a derivatives exposure threshold of 10% of net assets are mandated to establish a DRMP. This program must be administered by a designated Derivatives Risk Manager (DRM), an officer of the fund’s investment adviser, responsible for overseeing the fund’s derivatives activities and ensuring compliance with the rule.
Value-at-Risk (VaR) Limitations: The rule introduces VaR-based limits on the leverage risk of a fund’s portfolio. Funds are required to perform daily VaR calculations to ensure that their derivatives exposure does not exceed specified thresholds relative to their net asset value or a designated reference portfolio.
Board Oversight and Reporting: The fund’s board of directors/trustees must approve the designation of the DRM and receive regular reports on the DRMP’s implementation and effectiveness. This oversight ensures that the board is informed of the fund’s derivatives use and associated risks.
Limited Derivatives Users: Funds with derivatives exposure not exceeding 10% of their net assets are classified as “limited derivatives users.” While exempt from establishing a full DRMP, these funds must still adopt and implement written policies and procedures reasonably designed to manage their derivatives risks.
MARS Market Risk supports both Relative and Absolute VaR tests as required by SEC 18f-4, enabling fund managers to assess leverage risk. It also offers out-of-the-box VaR model backtesting over configurable time horizons. The broader MARS framework provides a full market risk workflow that helps identify the market variables influencing the valuation of any instrument. Stress testing options—historical, asset-class-level, custom, and predictive—are included, giving fund managers the tools to fulfil the derivatives risk management requirements specified by the SEC.
Several regulatory frameworks govern derivatives risk management for investment funds across different jurisdictions, including the European Union’s Alternative Investment Fund Managers Directive (AIFMD) and Undertakings for Collective Investment in Transferable Securities (UCITS), and Canada’s National Instrument 81-102 (NI 81-102) overseen by the Ontario Securities Commission (OSC).
Dharrini Bala Gadiyaram describes these evolving regulations and the demands they place on firms. “The Ontario Securities Commission (OSC) governs the activities of mutual funds and includes specific controls on aggregate exposure to derivatives—however, they recognize that VaR measures that factor in both price and volatility returns is a much better measure for a fund’s risk. They have also recognized that the risk-based approach in UCITS IV and SEC 18f-4, which rely on VaR, stress testing, and overall risk management, effectively address concerns about fund leverage for investment portfolios,” she says.
Addressing comparable regulatory developments in the EU, she continues, “Mutual funds sold in the European Union are subject to UCITS IV regulation, which prescribes two approaches to regulatory risk management: a VaR based approach or a commitment approach. There are complex rules concerning how derivatives can be translated into equivalent amounts of underlying assets, how they can be netted with offsetting exposures, and limits on the overall derivatives exposure. Additionally, marketing of alternate investment funds (AIFs) in the European Union is governed by the Alternate Investment Fund Managers Directive (AIFMD) which again has requirements around the implementation of effective risk management policies and procedures for market, liquidity, credit and counterparty risks among others, as well as monitoring risk profiles, disclosures and reporting to governing bodies and senior management,” she says.
Describing how MARS helps to address this complex and continually evolving regulatory landscape she continues, “Bloomberg’s regulatory compliance solutions under MARS Market Risk—which cover all of the above-mentioned regulations—can bring in a fund’s portfolio data, take on all of the work to map and enrich this data based on regulatory needs, and deliver complex risk analytics with comprehensive asset class coverage. Our aim is to remove the burden of calculating and compiling these reports to allow investment managers to focus on value generation. Due to the strength of our offering, the OSC has even provided exemptive relief to funds utilizing our solution as it helps to demonstrate that their risk monitoring, risk management and reporting are well documented and compliant with the needs of SEC 18f-4 and UCITS IV regulations,” she notes, and offers the following perspectives on the broader regulatory outlook.
“With the ongoing backdrop of geopolitical risks—stemming from market shocks from war and changing trade policy, we’re approaching significant financial deregulation in the U.S. In Europe and Asia, financial entities are already facing the pressure to follow suit for their markets to remain competitive. However, we’re seeing that our clients have implemented prudent risk management programs that are broadly aligned with regulatory market risk requirements because it helps them build institutional credibility and maintain financial stability. We’ve also received requests to stress their exposures with different geopolitical scenarios and assess financial impact of climate risk—as a combination of physical and transition risk. We are currently working on some very exciting solutions on both fronts,” she says.
Delivered on the Bloomberg Terminal and through APIs, MARS serves more than 1,100 professionals at over 900 client firms. It offers analytics for cash and derivatives instruments, including tools for front office risk, market risk, counterparty risk, credit risk, hedge accounting, collateral management, and regulatory capital.
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