investment banking technology

Investment Banking Technology

October 13, 2011

Chris BrookTechnical Lead, Credit IT - UBS Investment Bank

PUBLIC

University of BirminghamSchool of Computer ScienceCommercial Programming

www.ubs.com/graduates

Table of ContentsSECTION 1 Finance 101 - Key Concepts in Credit TradingSECTION 2 Grid ComputingSECTION 3 Real-time Business IntelligenceSECTION 4 Managing DevelopmentSECTION 5 Joining UBS


About Me

Chris BrookTechnical Lead, Structured Credit IT - UBS Investment Bank Joined UBS June 2011 Masters graduate in Aerospace Engineering 6 years experience, specialising in distributed systems and database

engineering


UBS — Our Services

Wealth Management Americas

Global Asset Management

Wealth Management & Swiss BankWealth Management & Swiss Bank focuses on delivering comprehensive financial services to high net worth and ultra high net worth individuals around the world – except those served by Wealth Management Americas – as well as private and corporate clients in Switzerland.Our Wealth Management business unit provides clients in over 40 countries, including Switzerland, with financial advice, products and tools to fit their individual needs. Our retail & Corporate business unit has a leading position cross its client segments in Switzerland.

Global Asset Management is a large-scale asset manager with businesses diversified across regions, capabilities and distribution channels. It offers investment capabilities and investment styles across all major traditional and alternative asset classes. These include equities, fixed income, currency, hedge fund, real estate and infrastructure investment capabilities that can also be combined in multi-asset strategies. The fund services unit provides legal fund set-up and accounting and reporting for all retail and institutional funds.

Wealth Management Americas provides advice-based relationships through financial advisors who deliver a fully integrated set of products and services specifically designed to address the needs of ultra high net worth, net worth and core affluent individuals and families.It includes the Wealth Management US Business, as well as the domestic Canadian business and the international business booked in the United State

Investment BankThe Investment Bank provides securities and other financial products and research in equities, fixed income, rates, foreign exchange and precious metals.

It also provides advisory services and access to the world's capital markets for corporate and institutional clients, governments, financial intermediaries and alternative asset managers and private investors.


UBS Investment BankThree main functions

Equities – distributing, trading, financing and clearing shares and share-linked products

Investment Banking Department – advising companies on their structure, funding, flotation, mergers & acquisitions

Fixed Income, Currencies & Commodities trading in Foreign Exchange, Interest Rates, Emerging Markets and Credit


SECTION 1

Finance 101 - Key Concepts in Credit Trading


101: How do Businesses Finance Themselves?

A share of the ownership of the company.

Price of each share = (Future Earnings + Assets - Liabilities) / Number of Shares

Issuing Equity (Shares)

Taking a Loan Loans pay interest – they have a cash flow

A bond is a debt security that entitles the holder to repayment of the principal sum plus interest.

Bonds have a face value (on which the issuer pays interest) a coupon (interest rate paid by issuer) and maturity (date that the principal is due to be re-paid)

Issuing Debt

(Bonds)

Bonds pay interest – they have a cash flow


101: What is the Value of Money?

Today, the value of £100 is £100 - But in one year it may be more or less.It could go up (earn interest). It could go down (be affected by inflation).

The Time Value of Money

But:• I’d really like the £100 back now…• And, I may not be paid back! - there is a risk attached to this loan

I could loan it to someone for one year, at 5% interest… (£105 to repay)

Discounted Cash Flow

‘Present value’ = Value today of a £105 debt, re-paid next year (e.g. £100)

‘Future value’ = How much my £100 could be worth in one year (e.g. £105)

DCF techniques are used to adjust for the ‘time value’ of money


101: Derivatives, Desks and Books

E.g. an Option - a contract giving the holder the right to buy or sell a quantity of something (the ‘asset’) at a set price, within a certain time period. The buyer pays a fee.

Derivatives

Trading Book

A portfolio of financial instruments held by a brokerage or bank. Each book can contain 1000’s of trades.

Occupied by licensed traders, usually specialising in trading one particular type of investment product / instrument.(e.g. foreign exchange traders, commodities traders, equities traders)

Trading Desks

A derivative is fundamentally a contract between two or more parties – a trade.

Its value is derived from the value and characteristics of another security - the underlying ‘asset’.


101: The Risks of Trading

Market Risk – the risk of loss due to fluctuations in the marketThe potential for the bank to experience losses due to fluctuations in prices of securities (e.g. the underlying assets).Every day your portfolio value will change depending on the market price of each trade within it.

Credit Risk is the risk of loss arising from a client who does not make payments as promised.

Such an event is called a default.Particularly in transactions lasting several years (e.g. a loan or mortgage) the lender

may need tomake financial provisions against the risk of default.

Understanding Credit Risk is an essential component of managing the bank’s balance sheet.

Credit Risk – the risk of loss due to non payment


101: Securitised Products: What is a CDO?Collateralised Debt Obligation

AAA-rated Bonds

AA-rated Bonds

A-rated Bonds

BBB-rated Bonds

BB-rated Bonds

‘Equity’ Bonds

Credit exposure

DiversifiedPortfolio of Credits generate Cash flows

Last Loss

5th Loss

4th Loss

3rd Loss

2nd Loss

1st Loss

Assets Liabilities Losses


From Sub Prime to Credit Crunch

Mortgages and loans produce a cash flow Subprime: making loans to people who may have difficulty repaying The Subprime mortgage crisis arose from 'bundling' American subprime and

American regular mortgages into Asset-backed securities (ABS/MBS) and selling these bundles onward

1. Real Estate prices peaked in the US in 2006, and then started to fall2. Leading to a rise in subprime mortgage defaults during 20073. Leading to an increase in losses reported within ABS/MBS4. During 2008 finance institutions wrote off $750 billion in associated losses5. ….which led to Banks experiencing reduced access to funds (and no money

to lend)


CDX Credit Default Swap Index 2007 to Feb 2011

HBOSRBSLehmans

Merrill

Bear StearnsNorthern Rock

SubprimeCrisis

US eases money

Greece in Trouble

Ireland in trouble

Citigroup

Icelandin trouble

US Stimulus Package

AIGWAMU

Spain onwatch

AIG loss

GM&Chrysler bankrupt


101: Managing Risk

Risk Management Market Risk (VaR, Stress) – probable loss on portfolio given changes in the market Credit Risk (PFE, CVA) – probable loss on portfolio given default of counterparty Profit and Loss explain (P&L) – daily change to the value of our trading positions Sensitivities – of prices due to potential changes in underlying parameters on which

their value is dependent Collateral – how can we ‘net’ this / optimise our use of collateral?

Front Office (The Traders) Position keeping, sensitivities FX book management Real time P&L – present value of our trading positions Continuous hedging – protect trading positions against potential shifts in the market


101: CDO Pricing is a little bit complicated…

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101: Monte Carlo Simulations

Monte Carlo is a powerful simulation method for estimating the future performance of a portfolio.

Relies on repeated random sampling to compute results.

Simulate sources of uncertainty affecting value, and then determine average value over the range of resultant outcomes.Time

Monte Carlo SimulationValue

Distributionof final values

For illustrative purposes only.

Monte Carlo Simulation

Monte Carlo simulation allows us to evaluate a wide range of market conditions and investment scenarios.


101: Monte Carlo Simulations – Computing challenges

Monte Carlo simulations are useful because… They are generic – you can model any cash flow They provide a Probability Distribution

However, they are computationally expensive… You can try and optimise your model You can pre-generate random numbers as input You can optimise your software to enable it to run faster And, you can run them on the Grid


101: Calculating the price and risk of every trade in a portfolio

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Several hundred scenarios per trade

Multiple types of trade

Thousands of trades

Future

Option Swap

Forward

AAA-rated NotesAA-rated NotesA-rated NotesBBB-rated NotesBB-rated NotesCDO equity










Delivered quicklyLots of data items


SECTION 2

Grid Computing


Sequential Computing

Excel typically calculates cells sequentially, based on dependencies.

Multi-threaded Excel can calculate in parallel, but is limited by CPU cores.

The 50 cells in this example take 10 seconds each to calculate.

50 x 10 = 500 sec CPU time

A dual-core machine would take over 4 minutes to calculate this simple example

…Can we continue buying faster workstations?


Parallel Computing on the Grid

Compute Server 1 Compute Server 100Compute Server 2 Compute Server 3 Compute Server 4 . . .

Grid ControllerA1 B1 C1 D1 E1A2A3A4A5A6A7A8A9A10

B2 C2 D2 E2B3 C3 D3 E3B4 C4 D4 E4B5 C5 D5 E5B6 C6 D6 E6B7 C7 D7 E7B8 C8 D8 E8B9 C9 D9 E9B10 D10 D10 E10

A1 C4 E5 D9 A8

Excel Add-in communicates with the Grid.

Grid Software divides calculation into 50 separate units of work. 5 second overhead in setting this up.

The work units are allocated to engines and computed simultaneously.

As engines complete, they notify the Grid Controller of the result.

Controller aggregates results and returns to Excel. Further 5 second overhead.

4 min calculation reduced to ~20 sec.

Distributed, parallel computation – break long running calculations into many pieces and run in parallel across many computers


UBS Investment Bank IT: Key Facts & Figures

> 24,000 Grid Engines (dedicated cores)

> 6,000 servers – grows 5% per year

> 2.4 Petabytes of storage – grows 12% per year

> 31,000 system changes in 2009 - grows 10% per year

>1.7 MW power consumption = 1700 Kettles!

October 2010


Current & future challenges for the Grid – feeding it!

Huge volumes of input and output data

Networks are not increasing in performance at the same rate as CPUs

Ensuring coherent data

Sequential or parallel calculations?

Sudden need for extra capacity – e.g. the ‘Flash Crash’ of May 2010?

CPU Scavenging? (use spare desktop capacity)


Essay QuestionOptimising workload to run on a grid is non-trivial…

Example: Daily Trade Valuation 108,000 trades need to be valued in London each day There are 20 different trade types: some are fast to price, some are slow

– 99% of trades fall into just 3 types (the simple or ‘vanilla’ trades)– However, the remaining 1% of trades account for 30% of the net calculation time!

Calculation time for a single trade is due to two things:– The amount of network I/O required to move the input data to the calc node– The amount of CPU time taken to calculate the result

We can bundle trades together, where they share common input data– This reduces network I/O time and contention, but will increase CPU time / decrease parallelism

The trade population changes daily, and new trade types can be created.Question Present some techniques which could be used to optimise the grouping of trades into work units, to

reduce the overall end-to-end processing time. Options could include using a feedback loop, based on instrumentation of the previous run. What about machine learning?


SECTION 3

Real-time Business Intelligence


The challenge of Timeliness AND Complexity

Decision making happens under pressure Data is changing dynamically Large amounts of data have to be analysed /

correlated You need to visualise data in a way that

supports decision making

This all needs to happen quickly


Introducing OLAP (online analytical processing)

OLAP gives the capability to query and analyse data using dimensions.

OLAP Cubes extend the two-dimensional array of a spreadsheet into n-dimensions.

A cube’s metadata structure is created from a star schema or snowflake schema, by joining several tables in a relational database.

OLAP tools are sold by database and analytic software vendors, and are widely used in business to analyse historical data, e.g. for root cause analysis.

Data is imported into the cube, and processed into complex proprietary data structures, optimised for querying of results. Data compression, bitmap indexes, and pre-aggregation are used to achieve fast query performance.OLAP performance depends on pre-processing of the data. It can be too slow to collect and analyse the input data to enable the business to make decisions on ‘live’ information (e.g. market prices)


Complex Event Processing (CEP)

Uses a ‘SQL-like’ language to query an Event Stream. An Event Stream could be live market prices / exchange

trades. Detect patterns among multiple streams of event data. Execute calculations on multiple streams of event data

– e.g. calculate averages. Information complexity is low but decision timeliness is fast.

The combination of CEP and OLAP provides a Real-Time Business Intelligence platform that enables us to analyse the latest information and react immediately.

Decision-making based on analysing streams of information in real-time.


Performance Metrics

Our Cube has 1 trillion data points 20 dimensions, 39 levels 5-days history held in memory 5-days – 250 GB loaded into cube

(50 GB x 5 days) 1-year history available on disk 1 year – 13 TB data is compressed into 1.5 TB

and loaded into cubes A new day’s data must be accessible

within 10 minutes

This translates into Processing concurrent Updates: 200,000 updates/sec – one every 5ms Processing concurrent Queries: 266 queries/sec


SECTION 4

Managing Development


UBS has 65,000 staff: 17,000 in IT (and 5,500 in the Investment Bank)

UBS IT: Our Geographic Footprint

Brazil

Hong Kong

Japan

Australia

RussiaAmericas3660

UK2829

.

APAC4341

Switzerland

5601

EMEA801


How to Manage an Enterprise Development Team?


Iterative / Lean DevelopmentIterative cycle (e.g. Scrum) Split work into small, tangible deliverables Split time into short fixed-length cycles Limit work per iteration Communicate: daily stand-ups (10 mins) Continually improve: reviews after each iteration Tailor methodology to the team

‘Lean’ principles (e.g. KanBan) Define workflow stages: To-Do, In-Progress,

Complete Limit tasks per workflow stage Constrain ‘Technical Debt’


Task Board @ UBS


Essential Practices for Sustainable Development

Modular Design

Compose the system from modular services.Strive to make the software maintainable, above all else.

Source Control Single shared code repository (global).

Unit Tests (TDD)

Write tests first (delivers better designs). Learn IoC and a Mocking framework.Run the tests on the build. Aim for high test coverage (>70%).

Automated Builds

Re-build after every check-in… never break the build!Repeatable process. Auditable.

‘One-Click’ Deploy Create scripts to install your most recent build, to any environment.

Design Patterns Learn the useful OO design patterns, and use them.

Continuous

Integration

Deploy your code automatically, and then run end-to-end tests.


Essential Practices for Sustainable Development


UBS Investment Bank IT: Award-winning Technology

UBS Delta: Most Innovative Actuarial Software Life & Pension Risk 2010

UBS Delta: Best Technology Vendor for Risk ManagementCredit Awards 2009

Technology Innovation AwardCredit Magazine 2009, 2010

Best Proprietary TechnologyBuy-Side Technology 2007

No.1 for Algorithmic TradingThomson Reuters Extel 2010

No.1 First for Overall Post-Trade ServicesZ/Yen McLagan 2009

No.1 for Post Trade Performance in FXMcLagan/Z-Yen 2010

No.1 for Post Trade Services – North AmericaZ/Yen McLagan 2009

Best in AlgorithmsAsianInvestor 2010

Best FX Post-Trade ServiceProfit & Loss 2010

Best All Round Solutions for Prime Broking Asiamoney 2006-2009

Best All Round Solutions for Prime Broking Thomson Reuters Extel 2001-2010

Best Firm for Portfolio Trading Execution Thomson Reuters Extel 2008-2010

Best product innovation for Prime BrokingAsiamoney 2009

Best Post Trade Services Global FX Week 2009

No.1 Internal Crossing The Trade 2010

Best Fixed Income Research and StrategyTechnical Analyst Magazine 2009

No.1 for Currency Forwards, Swaps and Vanilla Options Risk 2009


SECTION 5

Joining UBS


Graduate Training Program (GTP) – Your future at UBS

24 months

Building the network

The UBS GTP program will equip you with the skills, knowledge and experience to achieve long-term personal and professional goals and challenge you to achieve your potential.

You'll learn the business while developing your technical skills to deliver real world solutions.

By the end of the two year program you’ll be an integral part of the UBS Group Technology team.

Into the future

Joining the teamGetting on board

Role-based TrainingTechnical training based on individual learning needs

GTP DiscoveryGTP intro to UBS & Financial Services

GTP FundamentalsGT Strategy, Business Model & Operating Principles

Rotation

Permanent Placement


Ready for take off?Without our systems and infrastructure, we wouldn’t be in business …

Apply today at www.ubs.com / graduates

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