harnessing the network of banking intelligence shortening the lifecycle for trading new structured...
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![Page 1: Harnessing the Network of Banking Intelligence Shortening the lifecycle for trading new structured products Guillaume Aubert Misys Structured Products](https://reader035.vdocuments.mx/reader035/viewer/2022062417/5517f42655034693228b4726/html5/thumbnails/1.jpg)
Harnessing the Network of Banking Intelligence
Shortening the lifecycle for trading
new structured products
Guillaume AubertMisys Structured Products Expert
Head of Business SolutionsEMEA
Misys Treasury & Capital Markets
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Harnessing the Network of Banking Intelligence
Exotic and Structured ProductsOpportunities and Issues
• Opportunities– Significant growth in structured products volume
• Equity, FX, Interest Rates, Credit, Hybrids
– Significant evolution in products complexity• Yesterday's exotics becoming today’s vanilla: Variance swaps, Index CDOs…
– More profitable than vanilla instruments• Higher yield / spread
– Gain competitive advantage with innovation• Branding exercise
– Number if players is extending• regional banks, hedge funds..
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Harnessing the Network of Banking Intelligence
Exotic and Structured ProductsOpportunities and Issues
• Current Issues– Managed in spreadsheet - Operational Risk
• Lack of real control/visibility on trading activity/exposure
• Manual and costly processing
• No Audit-trail
– Managed in multiple systems - Reconciliation Nightmare• FO / BO
• By Asset Class (Hybrid Products)
– Insufficient valuation/risk framework – Market/Credit Risk• Approximate valuation
• Insufficient assessment of counterparty/market exposure
– Limited reactivity/creativity in a highly competitive environment
• Business ideas/opportunities are there
• IT or Product Control is not ready
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Harnessing the Network of Banking Intelligence
System Requirements
• Flexibility in Structured Products Design
• Control and Security in Trade Input and Access
• Trade Lifecycle and Integration
• Trends in Valuation Models
• Implementing a Structured Product Solution
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Harnessing the Network of Banking Intelligence
System Requirements
• Flexibility in Structured Products Design
• Control and Security in Trade Input and Access
• Trade Lifecycle and Integration
• Trends in Valuation Models
• Implementing a Structured Product Solution
Tim
e-To-M
arket
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Harnessing the Network of Banking Intelligence
Structured Products Design
Flexibility
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Harnessing the Network of Banking Intelligence
Genesis of a Structured Product Solution MUST
• Initial Client Request– 2002: Support for 20 new Structured Products FO/BO
– First option: 20 new ad-hoc products template
– Second option: An innovative and generic approach
– MUST: Multi-Underlying Structured Trades
• The Methodology– Analyze term-sheets across all asset classes and instruments
– Identify building blocks: components and formulas
– Define Data Model and Cash Flows Generation Rules
– Back-testing
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Harnessing the Network of Banking Intelligence
Building Blocks
• Input Events– Fixing, Barrier
• IR, Equity, FX, Credit, Pool Factor…
– Corporate Events• Credit Corporate Action, Stock Corporate Actions…
– User Actions• Call Option, Currency Chooser….
• Cash Flows– Formula-based Dates, Currencies, Amounts
• Contingent to input events, complex pay-off
• Variables– Formula-based period-dependent or path-dependent
• Input Parameters
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Harnessing the Network of Banking Intelligence
Callable Trigger PRDC
Effective Date: XXX
Maturity Date: XXX
Pay Leg
Ccy JPY
Coupon : First Period: XX
Max(A.FX-B,0)
Notional Exchange XXX
Early Redemption
Our Option to Call
Trigger FX > XXX
Rec Leg
Ccy USD
Coupon : Libor + XXX
Notional Exchange XXX
Start Call XXX End Call XXX
Start Trigger XXX
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Harnessing the Network of Banking Intelligence
Callable Trigger PRDC
Effective Date: XXX
Maturity Date: XXX
Pay Leg
Ccy JPY
Coupon : First Period: XX
Max(A.FX-B,0)
Notional Exchange XXX
Early Redemption
Our Option to Call
Trigger FX > XXX
Rec Leg
Ccy USD
Coupon : Libor + XXX
Notional Exchange XXX
Start Call XXX End Call XXX
Start Trigger XXX
Reset Components
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Harnessing the Network of Banking Intelligence
Callable Trigger PRDC
Effective Date: XXX
Maturity Date: XXX
Pay Leg
Ccy JPY
Coupon : First Period: XX
Max(A.FX-B,0)
Notional Exchange XXX
Early Redemption
Our Option to Call
Trigger FX > XXX
Rec Leg
Ccy USD
Coupon : Libor + XXX
Notional Exchange XXX
Start Call XXX End Call XXX
Start Trigger XXX
Barrier Components
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Harnessing the Network of Banking Intelligence
Callable Trigger PRDC
Effective Date: XXX
Maturity Date: XXX
Pay Leg
Ccy JPY
Coupon : First Period: XX
Max(A.FX-B,0)
Notional Exchange XXX
Early Redemption
Our Option to Call
Trigger FX > XXX
Rec Leg
Ccy USD
Coupon : Libor + XXX
Notional Exchange XXX
Start Call XXX End Call XXX
Start Trigger XXX
Option Components
![Page 13: Harnessing the Network of Banking Intelligence Shortening the lifecycle for trading new structured products Guillaume Aubert Misys Structured Products](https://reader035.vdocuments.mx/reader035/viewer/2022062417/5517f42655034693228b4726/html5/thumbnails/13.jpg)
Harnessing the Network of Banking Intelligence
Callable Trigger PRDC
Effective Date: XXX
Maturity Date: XXX
Pay Leg
Ccy JPY
Coupon : First Period: XX
Max(A.FX-B,0)
Notional Exchange XXX
Early Redemption
Our Option to Call
Trigger FX > XXX
Rec Leg
Ccy USD
Coupon : Libor + XXX
Notional Exchange XXX
Start Call XXX End Call XXX
Start Trigger XXX
Cash Flows Components
![Page 14: Harnessing the Network of Banking Intelligence Shortening the lifecycle for trading new structured products Guillaume Aubert Misys Structured Products](https://reader035.vdocuments.mx/reader035/viewer/2022062417/5517f42655034693228b4726/html5/thumbnails/14.jpg)
Harnessing the Network of Banking Intelligence
Callable Trigger PRDC
Effective Date: XXX
Maturity Date: XXX
Pay Leg
Ccy JPY
Coupon : First Period: XX
Max(A.FX-B,0)
Notional Exchange XXX
Early Redemption
Our Option to Call
Trigger FX > XXX
Rec Leg
Ccy USD
Coupon : Libor + XXX
Notional Exchange XXX
Start Call XXX End Call XXX
Start Trigger XXX
Input Parameters
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Harnessing the Network of Banking Intelligence
-Components
-Formulas
New Product: Building
Components and Formulas
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Harnessing the Network of Banking Intelligence
Components and Formulas
-Components
-Formulas
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Harnessing the Network of Banking Intelligence
Control and Security
Trade Input and Access
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Harnessing the Network of Banking Intelligence
Trade Input and Access
• Reduce and Track Operational Risk– Simplified Trades Entry
• Allows quick entry of complex trade and prevents booking error
– Configurable trade derivation/enrichment• Fully controlled by static data instead of hard-coded
– Read-Only Fields• Protecting a formula ensures the product remains as initially designed and does
not get altered at the time of trade entry
– Restricted Access to products family• Only authorized users must have access to specific complex products. The
system must protect against unauthorized access
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Harnessing the Network of Banking Intelligence
Callable Trigger PRDC cont’
• When structured products becomes as easy as vanilla…
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Harnessing the Network of Banking Intelligence
Trade Lifecycle and Integration
For free ?!
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Harnessing the Network of Banking Intelligence
Trade STP
• Trade events management is inherited from the components types:– Market Underlying =>Reset events– Credit Underlying =>Default event, Post-Default Lifecycle– Option =>Exercise event– Barrier =>Crossing event– etc…
• Accounting and P&L events are also inherited from component types:– All cash flows components => Cash events– interest components => Accrued Interest– Fee components => Amortizations– etc…
• Confirmation and Documentation: – A generic structured product framework allows for direct and
automated mapping of the product parameters and formulas into a document template
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Harnessing the Network of Banking Intelligence
Interfaces and Reporting
• A typical problem in interfacing and reporting structured products is the complexity of data model and the non-compatibility of the data model from one product to the other
• Implemented solution:– Product meta-description that summarizes the instruments
in a flat, simplified and standardized model– Mapping between the product parameters and the flat
representation can be a simple configuration– Example: the Callable Trigger PRDC presented earlier can
be viewed for reporting/interfacing purposes as:<Start Date, End Date, Main Notional, Main Rate, A, B, Floating Notional, Floating Spread, Option Start, Option End, Barrier Level, Barrier Start, Barrier End>
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Harnessing the Network of Banking Intelligence
Valuation Models
Trends…
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Harnessing the Network of Banking Intelligence
Valuation Models Trends
• Until recently pricing model integration was for the most part product specific:
– One Financial Product => One Pricing Model implementation
• Trend is shifting to a generic approach for several reasons:– Structured Product and Pricing Models are getting more and more
sophisticated– Latest model development such as affine models provides ideal
tool for generic and multi-asset calibration– Deployment of grid computing framework – Time-to-market with generic models is much more efficient
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Harnessing the Network of Banking Intelligence
What about Models Integration?
• Product independent pricing model implementation in the structured product engine requires:
– Automatic detection of the risk factors• This is possible by analyzing underlying, and payment currencies
– Proper separation of the different methods called during the valuation process:
• Calibration Instruments• Underlying process modeling• Numerical Procedure
– More importantly: easy translation of the product features (pay-off formulas, path-dependencies, Callable option..)
• So that these features do not need to be re-implemented at the pricing model level (in a tree or a MC simulation), and can be automatically interpreted by the pricing model from the product description
– Grid enabled at the pricing level• For ex: MC simulation path
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Harnessing the Network of Banking Intelligence
Implementing a Structured Products Solution
Providing
Expertise
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Harnessing the Network of Banking Intelligence
MUST Implementation Schema
Tier 1 International Investment Bank- Structured Rates Desk –
• 100 + Products Templates - Proprietary• Full ownership of the products design • Their own pricing models through APIs
implemented with the help of Misys Consulting
Tier 3 US House Financing Bank- Structured Advances Business -
• 20 + Products Templates• Work closely with Misys Consulting for
the definition of their products• Use provided core pricing solution such
as BGM model
New Product Design
Processing Definition:Accounting Schema, Payments, Docs…
Valuation Model
New Product Validation
Control and SecurityTrade Entry Screen, Access Control
New Product Design
Processing Definition:Accounting Schema, Payments, Docs…
Valuation Model
New Product Validation
Control and SecurityTrade Entry Screen, Access Control
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Harnessing the Network of Banking Intelligence
Conclusion Misys Summit/MUST
• 17+ years experience in providing solution to derivatives and structured products business
• 135 clients / 300 sites around the world managing their derivatives books in Summit
• 15 clients already LIVE on MUST – 25 clients currently implementing it
• Summit available in ASP model
• Summit/MUST: several times award winning as the most innovative solution
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Harnessing the Network of Banking Intelligence
Most recent Summit/MUST Awards
The Most Exciting & Innovative Software Release
The Best Technology Innovation of The Year - Europe
N°1 Cross-Asset Front-to-Back Office solution
Technology Company of The Year - Asia
N°1 Structured Products Front-to-Back Office system
N°1 Software on the Technology pinnacle
Best Sell-Side Innovation with Credit Derivatives on MUST