Harnessing the Network of Banking Intelligence Shortening the lifecycle for trading new structured products Guillaume Aubert Misys Structured Products

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


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..


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


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


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


Structured Products Design

Flexibility


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


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


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


Start Call XXX End Call XXX

Start Trigger XXX



Effective Date: XXX

Maturity Date: XXX

Pay Leg

Ccy JPY


Max(A.FX-B,0)


Early Redemption

Our Option to Call

Trigger FX > XXX

Rec Leg

Ccy USD




Start Trigger XXX

Reset Components



Effective Date: XXX

Maturity Date: XXX

Pay Leg

Ccy JPY


Max(A.FX-B,0)


Early Redemption

Our Option to Call

Trigger FX > XXX

Rec Leg

Ccy USD




Start Trigger XXX

Barrier Components



Effective Date: XXX

Maturity Date: XXX

Pay Leg

Ccy JPY


Max(A.FX-B,0)


Early Redemption

Our Option to Call

Trigger FX > XXX

Rec Leg

Ccy USD




Start Trigger XXX

Option Components



Effective Date: XXX

Maturity Date: XXX

Pay Leg

Ccy JPY


Max(A.FX-B,0)


Early Redemption

Our Option to Call

Trigger FX > XXX

Rec Leg

Ccy USD




Start Trigger XXX

Cash Flows Components



Effective Date: XXX

Maturity Date: XXX

Pay Leg

Ccy JPY


Max(A.FX-B,0)


Early Redemption

Our Option to Call

Trigger FX > XXX

Rec Leg

Ccy USD




Start Trigger XXX

Input Parameters


-Components

-Formulas

New Product: Building

Components and Formulas


Components and Formulas

-Components

-Formulas


Control and Security

Trade Input and Access


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


Callable Trigger PRDC cont’

• When structured products becomes as easy as vanilla…


Trade Lifecycle and Integration

For free ?!


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


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>


Valuation Models

Trends…


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


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


Implementing a Structured Products Solution

Providing

Expertise


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


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


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

Documents

Harnessing the Network of Banking Intelligence Shortening the lifecycle for trading new structured products Guillaume Aubert Misys Structured Products