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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
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..
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
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
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
Harnessing the Network of Banking Intelligence
Structured Products Design
Flexibility
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
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
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
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
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
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
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
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
Harnessing the Network of Banking Intelligence
-Components
-Formulas
New Product: Building
Components and Formulas
Harnessing the Network of Banking Intelligence
Components and Formulas
-Components
-Formulas
Harnessing the Network of Banking Intelligence
Control and Security
Trade Input and Access
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
Harnessing the Network of Banking Intelligence
Callable Trigger PRDC cont’
• When structured products becomes as easy as vanilla…
Harnessing the Network of Banking Intelligence
Trade Lifecycle and Integration
For free ?!
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
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>
Harnessing the Network of Banking Intelligence
Valuation Models
Trends…
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
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
Harnessing the Network of Banking Intelligence
Implementing a Structured Products Solution
Providing
Expertise
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
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
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