Over-the-Counter Derivatives
Corrigan: Cash Settlement a CDS Missing Link | Bear Stearns Still Going Strong--on Its Own | New-Product Niche Players | Athena Will Deal With Back-Office Complexity | RED Customer Turns Insider
Athena Will Deal With Back-Office Complexity
May 28, 2007
Recent International Swaps & Derivatives Association surveys indicate that hedge funds and their broker-dealer counterparties have made substantial progress in cutting down the backlog of unconfirmed credit default swaps transactions. But as hedge funds increasingly rely on OTC products to enhance portfolio returns, reduce market and credit risk and gain exposure to market sectors indirectly, it's a constant battle to keep those backlogs from recurring. And aside from that operational issue are market, credit and collateral risks requiring cutting-edge technology to manage.
"What happens if
the transaction isn't even booked correctly, or the hedge fund
manager doesn't have a full picture of positions or risk, because
there is no way to calculate market implication in real time?" asks
Scott Sykowski, president and co-founder of Athena Investment
Systems, a Boston consultancy that helps hedge funds improve their
IT infrastructures to handle OTC contracts.
A study on U.K. and continental European asset managers' OTC derivatives activity, released in December by the global financial markets practice of Surrey, U.K.-based consulting firm Detica, highlighted pricing and valuation, collateral management, investment risk management and operational management as the four key areas feeling an impact from OTC derivatives.
The one-year-old Athena has worked on those problems with 16 hedge fund managers, and more are lined up to leverage Athena's business and technological know-how.
Sykowski brings to the table a decade of training as a quantitative analyst and five years as director of product development for the fixed-income and derivatives business of Boston-based order management system supplier Macgregor, now owned by Investment Technology Group. His three partners were senior executives or product directors at financial software vendors. Another four consultants on the team have backgrounds in asset management technology.
Aggregating knowledge of system architecture and trading, accounting and risk systems, Sykowski says, Athena can listen to hedge fund managers talk about business problems involving managing OTC derivative transactions and determine the related IT issues that must be ironed out.
Of course, technology isn't everything. "As hedge funds often take on risk to find the elusive alpha, their support staff must be just as skilled and trained as their front-office colleagues," says Kevin Sauls, president of KGS Financial, a New York consultancy that helps design derivatives operational workflow procedures for clients.
But, with expertise in short supply, and only the largest hedge funds able or willing to ramp up their staffing, ensuring a solid IT infrastructure will certainly go a long way to helping alternative investment funds manage their complexity and workflow.
Even before opening in March 2006, Athena had developed a suite of modular components that reflected its owners' experience and their interest in focusing on hedge funds' OTC derivative issues. Those modules included data models for keeping track of securities positions and transactions, a data bus to communicate among applications, data validation and enrichment tools, reporting tools, and various system and application interfaces.
