Over-the-Counter Derivatives
RED Customer Turns Insider | Athena Will Deal With Back-Office Complexity | New-Product Niche Players | Bear Stearns Still Going Strong--on Its Own | Corrigan: Cash Settlement a CDS Missing Link |
New-Product Niche Players
May 28, 2007
"We find this to be a universal problem today," says Kevin Samborn, SVP at NumeriX, a New York-based provider of software to facilitate pricing and risk analytics for a range of existing and newly created derivatives. "As the volume of trading in these instruments has increased, and as derivative products themselves have become more sophisticated and complex, existing systems don't necessarily provide a third-party, fair-value price and also track the trade."
Aozora Bank, according to Samborn, eventually turned to Portfolio 2, an expanded pricing and analytics offering that NumeriX officially launched this month, to address its increasingly complicated trade management needs. The new system enables traders to analyze risk, competitively price a structured product and manage the full life cycle of a trade. "Now we can easily support all emerging products and be confident that our chosen platform will expand with the market," says Hideyuki Muto, Aozora's head of quants and financial engineering.
Commercial banks such as Aozora are not alone in facing such challenges as a developer and distributor of structured products. With asset managers, hedge funds and pension funds getting increasingly active in derivatives and structured products, providers of pricing and analytics software are feeling pressure to continuously update and improve their offerings.
Risk Management Tool
SuperDerivatives of London and New York, a pioneer in options pricing at its SuperDerivatives.com site, recently brought out SD-Funds, a multi-asset-class platform that combines pricing, analytics, trading, risk management and compliance. It is designed to analyze the correlation between positions in different asset classes and to provide mark-to-market pricing and compliance reporting.
David Gershon,
president and CEO of SuperDerivatives, describes the new offering
as "an extremely rich multi-asset solution for hedge funds and
asset managers" that utilizes the firm's independent revaluation
service, SD-Revaluation, and the SuperDerivatives benchmark pricing
model.
Such products quickly attract a following, analysts say, in part because while Excel spreadsheets remain a popular method of booking and pricing a wide range of trades and may be viable for modest volumes of derivatives activity, they are a far less acceptable solution as the volume and complexity of the instruments increases.
Currently, technology for valuations takes several forms. One is portfolio management systems that incorporate valuation functions, such as those offered by Calypso Technology, Imagine Software, Murex, OpenLink Financial, Sophis and SunGard Data Systems' Front Arena.
In other cases, pricing analytics vendors will provide basic building blocks--the models and mathematics--to price derivatives. They are also offering independent valuation services either directly or by embedding them in portfolio management products. NumeriX and SuperDerivatives are in this category, as are Algorithmics, FinancialCAD Corp., Investor Analytics, Lombard Risk, RiskMetrics Group and SunGard Reech.
"In this new world of trading, it is not likely that firms that cannot demonstrate a credible approach to pricing complex derivatives will stay in business and escape the scrutiny of regulators, institutional investors and ratings agencies," says Cubillas Ding, a senior analyst at Boston-based research firm Celent, which released a report this month on the structured-products valuation challenge.
