In the aftermath of the financial crisis, banks are revisiting their policies and systems infrastructure to adapt to new regulations, primarily focusing on optimising their cost of capital. Major changes are happening in the domains of market risk, credit risk, liquidity risk and collateral management. The changes are transforming the trading value chain, with a stronger need for integration in data and business processes. There are several examples of this.
The fundamental review of the trading book, a consultative document first published in 2012 by the Basel Committee, is a complete overhaul of market risk and regulatory capital. Its implementation dates are not yet specified, but banks have started designing solutions for the new standardised approach and are reviewing their internal models. It has profound implications for operations and technology, and it pushes further the need for integration between systems. For example, firms need to assess the model performance through a P&L attribution process that determines if risk models are properly capturing risk factors driving the trading desk P&L.
Many firms are setting up CVA desks for hedging counterparty risks that require technologies able to deliver near real time calculations of CVA and CVA sensitivities. A large group of banks is also including funding value adjustments in the pricing of uncollateralised trades. Other pricing adjustments (referred to as xVA) are finding their way into derivatives pricing and increasing its complexity.
It has become apparent that integration between multiple systems is complex, costly and increases operational risk
With the development of central clearing for OTC derivatives, dealers need to optimise their trading decisions by calculating Initial Margin and determining the best trading venues for their house or client trades. These calculations may include cross-margining of listed and cleared OTC derivatives.
In a move to promote further central clearing, the Basel Committee published in September 2013 a final set of recommendations for ‘Margin requirements for non-centrally cleared derivatives’ that will apply to all transactions that involve either financial firms or systemically important non-financial entities. This poses an immense challenge to reconciliation between players.
Collateral optimisation has taken a central stage and firms have revisited their collateral solutions in order to adapt to the new paradigm and build a global view of their assets.
These changes can hardly be looked at in silos. They have fundamentally altered the dynamics of trading derivatives from pre-deal analysis down to risk management and banks need to implement holistic solutions that optimise their trading activities while reducing their operational cost.
How Murex found a solution
With a massive investment in research and development, Murex has focused its energy on building its integrated risk management solution. We designed a risk engine that delivers high performance analytics for complex simulations and data aggregation (for xVA, PFE, initial margin and high throughput real-time VaR) using technologies such as in-memory aggregation and GPUs.
The fast processing of massive volumes of data is a key requirement as well. A CVA desk centralising hedge calculations for hundreds of thousands of trades needs to produce, aggregate and manipulate terabytes of data, including CVA sensitivities grids on thousands of counterparty agreements. Leveraging the latest innovations in data management is vital in order to deliver a solution.
Addressing costs and regulations
It has become apparent that integration between multiple systems is complex, costly and increases operational risk. To deal with this, banks have grown their IT departments considerably. With its integrated platform, Murex’s strategy is to deliver a complete range of trading, risk and processing functionality that clients can choose from. Some of our clients use the integrated solution (front, back and risk), while others use it for enterprise risk management such as counterparty credit risk and market risk. In both cases, clients benefit from obvious synergies and considerably lower their technology bills.
Reducing the total cost of ownership has been one of our main focuses over the last few years. Thanks to the packaging of best practices and our battle-tested implementation methodology, we have been able to deliver high-end functionality at reduced cost, time and operational risk. With our integration team and our implementation partners, we are also continuously helping our clients reduce their integration costs by packaging and delivering interfaces with their systems. Yet our MX.3 solution offers a high level of flexibility, facilitating the integration of new processes and business requirements as they emerge.
