Nasdaq's New AI Tool is Set to Change the World of Risk Calculation

Banks, insurers, and a range of other institutions using Nasdaq technology will soon have access to a ground-breaking AI solution to more efficiently calculate risk.

The recently announced technology, called the XVA Accelerator, aims to reduce the computational burden of calculations for managing risk, helping to meet regulatory demands and navigate market volatility while also easing strains on these financial institutions and ensuring more stability in the global financial system.

The Problem: Mounting Pressure for Complex Risk Analysis

Financial institutions are increasingly required to comply with complex regulatory frameworks, such as Basel III (as well as the upcoming updates to those regulatory standards), and ensure their risk management capability is fit for purpose. However, high-frequency, resource-intensive calculations can add significant operational and infrastructure costs.

At the heart of these demands is XVA, a term encompassing various value adjustments (VAs) like Credit Valuation Adjustment (CVA), Debit Valuation Adjustment (DVA), and Funding Valuation Adjustment (FVA). Each "VA" adjusts for specific financial risk—such as counterparty credit risk or funding costs.

Costs and complexity are sometimes so high that some financial institutions rely on larger counterparties rather than conducting them themselves.

“Small and medium-sized institutions typically can't invest in complex solutions or expensive hardware to compute those XVA metrics,” said Gil Guillaumey, Nasdaq SVP and Head of Capital Market Technology. “So, they rely on the numbers provided to them by bigger counterparties, posing the question of whether they are overcharging the smaller institutions.”

The Solution: Nasdaq’s AI-Powered Platform

Financial institutions large and small are increasingly turning to AI-powered tools to handle regulatory and market-driven risk needs, as demand for rapid and accurate data rises. To that end, Nasdaq’s Calypso platform integrates advanced machine learning, speeds up risk calculations by up to 100 times, and enables banks to make timely adjustments in response to market conditions. 

Now, by taking a new and novel approach to the mathematics underlying XVA, Nasdaq is aiming to leverage AI to help minimize the need for extensive calculations (and the physical infrastructure they require), potentially saving financial institutions millions of dollars in operational expenses.

The XVA Accelerator uses Chebyshev Tensors, a mathematical technique that enables more efficient risk calculations by identifying key risk scenarios and focusing computational resources accordingly. With its dynamic recalibration capability, it quickly adapts to changing market conditions, providing financial institutions with up-to-date risk data.

Nasdaq developed the XVA Accelerator through collaboration with MoCaX Intelligence, a partner known for its quantitative modeling expertise, as well as feedback from early pilot clients to ensure accuracy and computational efficiency on real production data.

Implications for Cost Structure and Risk Management

By streamlining calculations, Nasdaq’s approach helps lower both energy consumption and the overall carbon footprint associated with high-frequency risk assessments. Additionally, banks and insurers can manage extensive portfolios, leading to substantial cost savings and increased operational efficiency.

Those theorized reductions in time and money spent on XVA were confirmed in initial testing of the technology.

“We partnered with a couple of clients to make sure that the solution we were building was delivering accurate results on production data alongside a significant improvement of computation time,” Guillaumey said.

And, as Guillaumey explained, these AI-driven advancements not only benefit large financial players but also provide smaller and medium-sized institutions with affordable, scalable solutions that can reduce dependency on larger counterparties for risk management and pricing models.

Nasdaq’s Role in Financial Technology Modernization

With Nasdaq’s AI-based XVA Accelerator, the future of risk management in finance may see significant gains in efficiency, marking a shift toward more sustainable and cost-effective practices.

Looking ahead, Guillaumey said he sees potential for the XVA Accelerator’s capabilities to help financial institutions meet upcoming regulatory requirements, such as the Fundamental Review of the Trading Book, which mandates scenario-based calculations like Value at Risk and Expected Shortfall.

Leveraging artificial intelligence in this way, Guillaumey added, is part of Nasdaq’s “overall objectives to help clients modernize and simplify their capital market solution stack, while at the same time complying with an increasing number of internal and external obligations.” 

Indeed, Nasdaq’s latest innovation is part of broader efforts to assist the more than 3,500 financial institutions it supports in tackling the most important operational challenges, ensuring a more stable and resilient financial system in the process.