Description Mid-code Crisis http://misys.com Thu, 16 May 2013 16:45:00 Thu, 16 May 2013 16:45:00 Bret Bolin, Misys CEO http://misys.com/misysblog/2013/why-i-cant-wait-for-the-european-market-forum.aspx Looking back it seems like we just launched new Misys and here we are one year later. It has been a busy year with lots of changes and I'm looking forward to sharing some key announcements with you at our European Market Forum on 17-19 June in Budapest, Hungary. Our market forums present an opportunity to keep you informed not only of Misys product updates and launches but also key developments in the finance industry and what they mean for you and your systems. With our largest customer base in Europe the European Market Forum is one I particularly enjoy. Last year the European Market Forum focussed on our product roadmaps and how new Misys would continue to support and add value to your systems. This year we will be putting forward even more robust product strategies and plans, announcing product launches and hosting roundtable discussions with market thought leaders on the most important issues facing you today. If you haven't yet registered to attend, you should. This year we have a standout keynote speaker, Baroness Eliza Manningham-Buller, who headed Britain's Security Service (MI5) from 2002 to 2007, discussing leadership in challenging times. We will also be hosting our Gala Dinner Event again giving you the opportunity to network with your peers from more than 250 top financial institutions along with the Misys team. To register, simply visit /events/european-market-forum-2013.aspx I can't wait for the European Market Forum and I'm looking forward to seeing all of our European customers in Budapest. http://misys.com/misysblog/2013/why-i-cant-wait-for-the-european-market-forum.aspx http://misys.com/misysblog/2013/why-i-cant-wait-for-the-european-market-forum.aspx Thu, 16 May 2013 16:45:00 David Dixon http://misys.com/misysblog/2013/uncertainty-in-otc-market-reform-continues.aspx Uncertainty continues in OTC market reform… In its fifth quarterly progress report on international efforts to push over-the-counter derivatives trading to electronic platforms, the Financial Stability Board has stated that none of its 24 jurisdictions have fully implemented guidelines first laid down in 2009. In a press release and report the FSB reports that  "less than half of the FSB member jurisdictions currently have legislative and regulatory frameworks in place to implement the G20 commitments and there remains significant scope for increases in trade reporting, central clearing, and exchange and electronic platform trading in global OTC derivatives markets" In this climate of uncertainty it continues to be difficult to finalise processes and systems such as in the areas of trade reporting and margining.  It is clearly a huge headache for all of us, software suppliers and banks alike. We all have to be in a position to meet the requirements, even if we're not sure what they will be, by the mandated dates. As a software house we have to assume the rules will not be postponed (again!) and make sure we provide a system that lets you comply. How do we do this? The good news is that Misys has been working with regulators and market services for some years now and we are well placed with over 20 years of expertise in the derivatives market developing software that responds to these regulations. Some aspects of the regulations are clear and known The clearing process and workflow in the US has been in place for some time, and Misys has had support for over a year.  In the US the Dodd-Frank reporting rules are very detailed, DTCC and CME both offer trade repositories with defined interfaces, so we know what is required.  In Europe the Regis-TR repository is now similarly well-defined and we are working to have an interface in place in time for the September deadline. However even in this area there are aspects where there is less clarity. One example is whether a trade is required to be reported to more than one repository. To cater for this, Misys has built the flexibility to report a trade to multiple repositories, and even allow for the possibility that each repository will use a different "unique" trade identifier. Another example is found with Legal Entity Identifiers (LEIs) and Universal Product Identifiers (UPIs). Misys already has support for LEIs and UPIs -  although they are not fully in force yet. Other aspects are less clear In Asia regulations are in place for trade repositories in Hong Kong and Tokyo, but are less well advanced in other countries. To address this we have built our repository support to be flexible, allowing different fields and workflows to be mapped, and we are quietly confident that if we have the design to support the US, Europe, Hong Kong and Tokyo we will be well positioned for other repositories as they emerge. Another uncertain requirement is for margin calculations; we are certain that margining will be necessary but can't go much deeper than that- the CFTC tried publishing rules but Bloomberg promptly challenged them in the courts. For margining we plan to  build links to known calculation services, such as those provided by LCH or CME, and develop APIs, hooks to allow calculation routines to be incorporated into our software as and when the formulae are known. And some things are simply still unknown and to be decided! Swap Execution Facilities (SEFs) still need to be agreed but we have made the assumption  based on our customer advisory boards and industry connections that Bloomberg will be important. We are building a link to the Bloomberg Gateway.net interface, which gives access for Misys trading systems to Bloomberg's TOMS and AIM trading systems, and expect to have this certified shortly. Another area is cross-border reporting but of course Misys trading systems are already used internationally by international organisations; many of the questions being raised are really no different from the normal day-to-day processing we've been doing for years. Finally there are the things that haven't been anticipated yet: perhaps new regulations or workflows to address unintended consequences. These are bound to happen and when they occur we will work to address them as efficiently as possible, This is our normal business so we should have no problems in responding to the new needs as they arise. Further reading: Download our whitepaper on central clearing Download our whitepaper on Swaps definition and SEFs Download our Summit FT Fact Sheet on Central Clearing www.financialstabilityboard.org/ http://misys.com/misysblog/2013/uncertainty-in-otc-market-reform-continues.aspx http://misys.com/misysblog/2013/uncertainty-in-otc-market-reform-continues.aspx Tue, 07 May 2013 10:40:00 Risk in the Market http://misys.com/misysblog/2012/q1/meet-the-team-turaz's-new-executive-line-up.aspx Turaz has named its new executive line up, headed by Bret Bolin, the former Chief Executive Officer of P2 Energy Solutions, the largest independent technology company providing solutions to the upstream oil and gas industry. Mr Bolin has led a number of software companies within the Vista Equity Partners' portfolio during the past 12 years. The new Turaz CEO said: "This is an exciting time to be joining a company that's solely dedicated to delivering trade and risk management software. Our teams of experts are passionate about ensuring that we provide our customers with the tools they need to manage risk effectively in today's markets." Prior to his role at P2 Energy Solutions, Mr Brolin was Chief Financial Officer at Ventyx Inc, a global provider of software, data and consulting solutions to the utility, energy and telecommunications industries. Mr Bolin joined the Ventyx team as CFO of MDSI Mobile Data Solutions in late 2005. Before joining Ventyx, Mr Bolin was a senior director at Alvarez & Marsal Business Consulting, a member of the founding management team of SourceNet Solutions, Inc, and a leader in Andersen's Business Consulting practice. New Team in Place at Turaz The team Mr Bolin will lead is comprised of new faces as well as executives from Thomson Reuters Trade and Risk Management. Alan Somerville, the company's Senior Vice-President Professional services and support has more than 28 years of experience in the enterprise applications software industry. Before taking up his role at Turaz, Mr Somerville was Senior Vice-President, International Professional Services at Ventyx. He joined Ventyx when that company acquired Global Energy Decisions in 2007, where he was Senior Vice-President of Global Operations. Boris Lipianen, Global Head of Product Management and Strategy continues in the role he has held since he joined Thomson Reuters Trade and Risk Management business in 2007. In 2008 he also took responsibility for research and development. His previous roles include Associate Principal at McKinsey Business Technology and CIO and COO of DialogBank in Moscow. Tom Dawkins, Director of Strategic Programmes, has been with Thomson Reuters Trade and Risk Management for six years as Regional Director for North, based in New York. He returned to the UK in 2011 to support the sale of the business and will be responsible for implementing operational transformation. John Palmiero, Global Head of Sales, has more than 25 years of experience across all aspects of the banking software industry in Europe and Asia. He joined Thomson Reuters Trade and Risk Management in 2006 as the Hong Kong-based Regional Director for Asia Pacific. In 2010 he moved to Europe as Regional Director, EMEA and consolidated the company's core European businesses. Together, the new executive team are committed to delivering Turaz's road map and achieving our long term strategic goals. You can can explore their biographies in more detail on our  website . Please click here to return to the  Risk in the Market homepage http://misys.com/misysblog/2012/q1/meet-the-team-turaz's-new-executive-line-up.aspx http://misys.com/misysblog/2012/q1/meet-the-team-turaz's-new-executive-line-up.aspx Mon, 06 February 2012 09:33:00 Risk in the Market http://misys.com/misysblog/2012/q1/turaz-named-best-overall.aspx Turaz has been named Best Overall Trading Systems Technology Provider in the  Risk  technology vendor rankings 2011. The rankings are based on the responses of more than 800 technology end-users at banks, hedge funds, pension funds, insurance companies and corporate treasuries. Respondents, who were asked to base their votes on functionality, usability, performance, return on investment and reliability, ranked Kondor+ the best front- to back-office trading system. Turaz claimed the top spot in the Trading Systems category after being ranked number two in 2010. The company also claimed top ranking in two other categories - FX Trading Systems and Pricing and Analytics - Inflation. Turaz took the number two spot as Overall Technology Vendor. Winning this award demonstrates Turaz's commitment to ensuring we provide our customers with the best possible products and services. Risk  reported that Turaz's win in the 'hotly-contested' trading system section indicated that Kondor+ users were 'keeping faith' with the cross-asset trading platform through the current period of market turbulence. Boris Lipiainen, global head of product management and strategy at Turaz told  Risk : "Our technology is constantly evolving in line with client requirements, and enables our customers to cope with evolving market challenges." He said clients were increasingly moving to a single platform for trades and credit related information in order to gain the transparency required for Basel III. A single platform better enables users to explain and decompose risk parameters as well as to spot and analyse concentrations and correlations. The  Risk  ranking is the latest in a series of awards Turaz's products have garnered during the past few years. For example,  AsiaRisk  ranked Turaz the number one risk technology provider for three consecutive years from 2008;  FX Week  named the company the best vendor for dealing technology in its annual Best Banks Awards, and Chartis Research named Turaz Best in Trading & Capital Markets in its Risk Tech 100 awards. Find out more about Turaz's awards at  /pr-awards/awards.aspx Please click here to return to the  Risk in the Market  homepage http://misys.com/misysblog/2012/q1/turaz-named-best-overall.aspx http://misys.com/misysblog/2012/q1/turaz-named-best-overall.aspx Tue, 14 February 2012 09:25:00 Risk in the Market http://misys.com/misysblog/2012/q1/solvency-ii-–-seeing-it-for-what-it-is.aspx This is the seventh and final post in our series on Solvency II. As we have explored the requirements of Solvency II, one thing has become very apparent - the new directive will require a substantial amount of reporting produced to short deadlines. SOLVENCY II - SEEING IT FOR WHAT IT IS Throughout our series of articles on Solvency II, we have looked at the challenges that face the insurance industry if they are to fully comply with the new directive. Data Management ,  valuation of assets and liabilities  and  risk analysis  are all issues to be addressed, but there is one aspect that we have not yet covered that lies at the heart of everything.     The disclosure issue As we have explored the requirements of Solvency II, one thing has become very apparent - the new directive will require a substantial amount of reporting produced to short deadlines. In our post ' Solvency II - Meeting the Challenges Head-on ', we discussed the notoriously heterogeneous IT landscape of the insurance industry that will make compliance to this particular pillar a huge challenge. The reports required under the new directive will be both qualitative and quantitative and will either be in a specified standard format or ad-hoc in nature. To ensure compliance, insurers will have to make vast improvements to their IT infrastructure. Most likely, this will involve looking at the existing systems, integrating them where possible and investing in powerful business intelligence reporting tools.  This will help companies gain access to data, from numerous sources, to produce reports illustrating an integrated view of their market position quickly and accurately. Solvency II - a great opportunity There is no doubt that Solvency II will have a major impact on the insurance industry when it comes into force. There will be some who see it as an unnecessary regulation tying up their business in yet more red tape. However, the more progressive companies will see it for what it really is - an opportunity to improve their business and gain a competitive advantage within their marketplace. As we have seen above, the key to successful compliance comes down to strengthening a company's IT infrastructure by: By achieving superior risk assessment capabilities in terms of speed and accuracy, they will have sufficient flexibility within their solution to think beyond pure regulatory requirements by considering additional aspects such as liquidity and risk. Preparing for Solvency II is daunting. But by seeking an integrated business intelligence solution that can cope with the delivery of fast and accurate ad-hoc reports, will strengthen a company's market standing and meet the regulatory timetable. This Solvency II series was serialised for Risk in the Market by Sally Ormond from our white paper, 'How To Solve The Solvency II Challenge'. The full Solvency II white paper can be  downloaded here . Please click here to return to the  Risk in the Market  homepage http://misys.com/misysblog/2012/q1/solvency-ii-–-seeing-it-for-what-it-is.aspx http://misys.com/misysblog/2012/q1/solvency-ii-–-seeing-it-for-what-it-is.aspx Tue, 21 February 2012 08:44:00 Risk in the Market http://misys.com/misysblog/2012/q1/a-new-vista-opens-for-turaz.aspx Vista Equity Partners has launched Turaz, the result of its acquisition of Thomson Reuters' Trade and Risk Management business. "Closing this deal with Thomson Reuters and acquiring what is already a very successful business in its own right is a great strategic transaction for Vista," said Robert F. Smith, Vista's founder and CEO. "We will apply our proven expertise in growing dynamic, successful technology-based organisations that deliver a great customer experience. We look forward to supporting the Turaz management team as they continue to grow the company and realise its full potential." A US-based private equity firm, Vista Equity Partners has invested more than $5 billion in capital, primarily focused on companies that develop mission critical enterprise software systems. Turaz will be based in London and will retain its global presence. Bret Bolin, who has successfully led a number of software companies within the Vista Equity Partners' portfolio during the past 12 years, will serve as President and CEO of the new company. He said: "In terms of strategic priorities moving forward, first and foremost is our commitment to providing customer value and delivering on our road map. This is demonstrated by the launch of Kondor+ 3.3. The new version has already been positively received - with both new named clients and upgrades from our existing customer base. In the coming months, we will also be engaging with our clients to discuss how we can best work together to improve our business. I look forward to our continued collaboration as we grow our global footprint to best serve our customers' needs." Tom Dawkins, Director of Strategic Programmes at Turaz, said Vista had built up an extensive knowledge of how to run software companies effectively and improve products and services for customers. Best practice and ideas are shared between the portfolio of Vista companies. "Being a part of Vista's portfolio is like being part of a large software business, rather than a standalone, private equity owned company," he said. The acquisition by Vista will enable Turaz to focus on developing software that meets its customers' needs, without the distraction of the short-term targets tied to quarterly results that come with being part of a public company, said Mr Dawkins. Turaz will also continue its global operations, which he says are an important differentiator for the company. "Vista's philosophy is to focus on customer satisfaction by delivering market-leading products and great service. If you get this right, business growth is assured," says Mr Dawkins. "A high percentage of clients of Vista's portfolio companies report improved satisfaction with customer service and product quality following acquisition by Vista." Turaz will build on the progress made in the past five years that have led to Kondor+ becoming an award-winning software solution for the financial industry, he said. http://misys.com/misysblog/2012/q1/a-new-vista-opens-for-turaz.aspx http://misys.com/misysblog/2012/q1/a-new-vista-opens-for-turaz.aspx Wed, 01 February 2012 09:46:00 Risk in the Market http://misys.com/misysblog/2012/q1/european-accord-set-to-tame-otc-derivatives.aspx European Union officials and the European Parliament have reached an accord to impose regulation on the over-the-counter (OTC) derivatives market.  The roughly $700 trillion derivatives market, criticised as an opaque area of finance that hides risks from regulators, will face standardisation that will make it easier to clear derivative trades through clearing houses. The Unregulated OTC Market The unregulated OTC market currently accounts for 95 per cent of all derivatives trades made by banks, hedge funds and other market participants. The new European market infrastructure regulation (EMIR), will mean that all deals conducted either on or off an exchange, will be recorded. Market players that continue to trade on the unregulated OTC market, such as London clearing house LCH Clearnet, will face higher capital charges that will add to cost in a bid to reflect extra risk. New OTC legislation Negotiators from the European Parliament and the EU Council will formally approve the new regulatory legislation later this year. "It is a key step in our effort to establish a safer and sounder regulatory framework for European financial markets," said Michel Barnier, the European commissioner for internal markets and services. "The regulation ensures that information on all European derivative transactions will be reported to trade repositories and be accessible to supervisory authorities, including the  European Securities and Markets Authority , to give policy makers and supervisors a clear overview of what is going on in the markets," he added. Central counterparties (CCPs), will provide a safety net by stepping in should either buyer or seller default on its obligation. Mr Barnier argued that this would buffer financial contagion should a financial firm collapse, like Lehman Brothers in 2008. The Impact of the new OTC regulation Some analysts point to risks in the proposed legislation, and argue regulators will find it hard to monitor such a large market. The centralisation of the clearing process has also been criticised as the dangerous concentration of risk into one body. Furthermore, companies will not know how the new regulation will affect them until the EU Commission decides upon legislative details delegated to them by the EU Parliament, adding uncertainty to the market. Questions over how the legislation will affect market liquidity and types of trades made are high on the agenda. Smaller firms face higher risk of losing out, since it is harder to justify investment in technology that will help a smooth transition from an unregulated to regulated market for a smaller volume of trades. Whilst larger firms will still be affected, they are likely to be more comfortable with initial market uncertainty. Debate has been raised over the deadline for passing the new rules. The end of 2012 deadline may therefore be pushed back to callow a healthy consultation period in order to maximise efficiency of the legislation when it is finally in place. This article was written by Victoria Maigrot.  Please click here to return to  Risk in the Market  home page.  http://misys.com/misysblog/2012/q1/european-accord-set-to-tame-otc-derivatives.aspx http://misys.com/misysblog/2012/q1/european-accord-set-to-tame-otc-derivatives.aspx Fri, 02 March 2012 15:48:00 Risk in the Market http://misys.com/misysblog/2012/q1/cva-(credit-value-adjustment)-–-the-origins.aspx This is the first in a series of posts looking at Credit Value Adjustment (CVA) and its role in today's risk infrastructure.  What exactly is Credit Value Adjustment (CVA)? Essentially, it is the difference between the risk-free portfolio and true portfolio valuation, capturing the counterparty default risk inherent in  Over The Counter (OTC) derivatives  portfolios. In the past, the valuation of counterparty credit risk (CCR) was, in the main, ignored. This was mainly due to the relatively small size of derivatives exposures and the high credit rating of the counterparties involved (usually highly rated financial institutions). However, the market volatility experienced during the financial crisis has driven many organisations to review their methods of accounting for CCR. Post crisis CVA The crisis of 2008 took its toll. As the size of derivatives exposure increased, the credit quality of the counterparties fell. It was at that point that valuation of CCR could no longer be assumed to be negligible and had to be priced in. Today, CVA appears in several different contexts: Managing P&L volatility arising from counterparty default risk in large OTC books Accounting standards organizations (specifically, with the development of IFRS 7 and ASC820 standards for fair value) It forms part of the requirements for additional regulatory capitals, as put forward in the  Basel III framework As to the level of CVA management to attain, that's for each bank to decide. The variables that will determine their choice will depend on:   So, a bank with limited derivatives activity may opt to stay at a compliance level and restrict investment in CVA measurement to the level required to remain in line with the account and supervisory regime in place. But a larger derivatives player will transfer CVAs from individual trading departments to a consolidated CVA desk that will hedge or even trade CVA. The next post in this series will explore the concept of CVA in more detail.  Please click here to return to the  Risk in the Market  homepage http://misys.com/misysblog/2012/q1/cva-(credit-value-adjustment)-–-the-origins.aspx http://misys.com/misysblog/2012/q1/cva-(credit-value-adjustment)-–-the-origins.aspx Fri, 09 March 2012 15:36:00 Risk in the Market http://misys.com/misysblog/2012/q1/kondorplus-pricing-t1-t2-t3.aspx As mentioned in our last post in the innovation series, our examination into Kondor+ pricing has led to  an architectural vision we call T1 T2 T3 , the first step of which is in development. The name T1 T2 T3 comes from a lazy enunciation of a mathematical equation: This equation represents the performance dimensions at play when pricing a portfolio or a set of trades. For each deal  i  (or more generally, each pricing task  i,  if the same deal is priced under multiple scenarios), we care about; Time to access the deal ( );  Time to access the pertinent market data( );  Time to do the pricing analytics ( ). While it is obvious that scalable pricing boils down to architecting pricing so that this summation attains minimal value, what the equation also does is crystallize the separations that we wanted to embed in the new architecture. These include:   Modularity : by having separate mathematical terms for the time it takes to do deal retrieval, market data retrieval and analytical calculation, implicitly we are saying that we have separate, disjointed code for each of these, in effect organizing pricing into three modules each of which should have well-defined and succinct entry points. This is a major departure from how the Kondor+ pricing code is undertaken today, and has important consequences that are outlined below. Servitization : the fact that the code is organized around functionally meaningful modules means that we can turn each of these into a service, with a well-defined and simple API for each and for the pricing process overall. Openness : as a consequence of the above, we can architect a plug-in based architecture where the  implementation  of a service can be replaced. We can even have multiple implementations with some configuration mechanism for the user to choose implementations. This is the key to openness: for instance, it means users could choose which model to use from multiple models, if they all comply with the pricing analytics API. Or they can choose to get market data from different sources besides the Kondor+ database (such as from a simulation engine, as in the KGR market risk use case, or from an external curve management repository). I/O vs CPU Performance : by separating the mathematical terms that deal with data retrieval that are I/O-intensive (,) from those that deal with CPU-intensive (), we focus our performance thinking around the need for two different parts of the architecture: one, the need to cache data, ideally in some form of distributed memory cache, to address the I/O-intensive part of the process; and two, the need to scale up, via parallelization, the CPU-intensive parts. We need to envision a distributed architecture from the start, ideally running on commodity hardware.   Thus, T1 T2 T3 defines a new architectural vision for Kondor+ pricing. It represents a flexible, scalable pricing service that any application could use to price with any model and any number of sources of potentially simulated market data.  So, for example, KGR would not be forced to use RisKatcher as the only means to get prices -it would instead call a scalable, modular Kondor+ Pricing Service that is designed from the start to handle the types of volumes that KGR imposes. The following diagram summarizes the end game: Additional benefits accrue to this architecture: by modularizing the code in this way, we also centralize where in the code pricing is done. This removes some duplication and inconsistency that exists in the current code base. It also becomes easier to unit test the system. Neat vision; so what are we doing in practice? As a first phase, we chose to tackle pricing openness in Kondor+ 3.3, specifically for swaptions, covering the functional ability for customers to attach any model to a swaption. While this does not yet get into the scalability aspects of T1 T2 T3, it does force a reorganization of the pricing code (at least for swaptions) in a modular way so that pricing analytics can be a standard plug-in, via a generic cross-asset API. Many more phases will be required on the path towards T1 T2 T3. Each step may seem small, but the direction we are going in is clearly accretive. Such a methodology is how big change can come about.  Please click here to return to the  Risk in the Market  homepage http://misys.com/misysblog/2012/q1/kondorplus-pricing-t1-t2-t3.aspx http://misys.com/misysblog/2012/q1/kondorplus-pricing-t1-t2-t3.aspx Thu, 29 March 2012 13:02:00 Risk in the Market http://misys.com/misysblog/2012/q1/the-cva-concept.aspx This is the second in a series of posts looking at Credit Value Adjustment (CVA) and its role in today's risk infrastructure. In this post, we focus on the concept of CVA. THE CVA CONCEPT To demonstrate the effect of credit default risk on the market price of a derivative, let's assume our bank, Bank B, holds an interest rate swap (IRS) against counterparty, Bank A. According to a recent news item, Bank A may be in financial trouble, therefore increasing the chances of this counterparty being unable to honour the outstanding cash flows under this contract. For the purposes of this illustration, let's assume the IRS has a positive value to Bank B: IRS value  before  the bad news =  X  (1,000,000 EUR) IRS value  after  the bad news was disclosed =  Y  (800,000 EUR) As a result, the value of this IRS has diminished and the bank's balance sheet is affected: Credit P&L: Y-X  (-200,000 EUR) For historical and practical reasons, however, the trading desks continue to price these derivatives off the risk-free course. So, to account for the credit loss, the CVA is defined as the difference between the value of an OTC derivative under default-free assumption (or credit risk-free price) and the true value of the derivative, accounting for the possible default of the counterparty: CVA = Credit risk free price - Fair value What makes CVA more complex still is that the calculation can be in a  bilateral  basis because changes in our own bank's credit rating (Bank B) also change the fair value of the derivative. To take account of our own credit default risk one more term must be added: the debt value adjustment (DVA), to arrive at the following definition: Fair Value = Credit risk price - CVA + DVA So what can we learn? Well, firstly, CVA and DVA are views based on the potential for credit default losses by Bank B if the counterparty (Bank A) defaults and by the counterparty (Bank A) if Bank B defaults. Also, a credit loss only occurs if the outstanding contractual flows have a positive value at the time of default. Therefore, CVA is only incurred if the expected future exposure (EFE) is positive, at least at some point in the life of the transaction. The volatility of the underlying market data drives future expected exposure, even in cases where the current price of the derivatives does not depend on the volatility, for example in the case of a plain vanilla swap. Secondly, while  market risk  is diversified across the entire bank's portfolios, a potential credit loss affects only those transactions with the defaulting counterparty. Credit derivatives, netting and collateral agreements are instruments that can be used to insure against such losses. They will decrease the exposure and therefore the possible loss. Monte Carlo simulation is the most common method used to compute the future exposure. Therefore, CVA is the integral (or sum if discretized to time intervals) of the discounted expected positive exposure (EPE), weighted by the probability of default density over time, multiplied by the loss given default (LGD). In the next blog in this series on CVA, we'll address the key drivers that are forcing banks to calculate CVA. Please click here to return to the  Risk in the Market  homepage   http://misys.com/misysblog/2012/q1/the-cva-concept.aspx http://misys.com/misysblog/2012/q1/the-cva-concept.aspx Tue, 27 March 2012 00:00:00 Risk in the Market http://misys.com/misysblog/2012/q1/emotions-run-high-over-hft.aspx Despite growing in volumes, high frequency trading (HFT) faces strong opposition from some sectors of the financial markets, regulators and politicians. Regulators in the US and Europe have HFT in their sights, concerned about the threat the strategy could pose to market stability.  HFT is a strategy within algorithmic trading, whereby a large number of orders are sent into the market at very high speed. Participants take advantage of very small price imbalances at a high rate of recurrence, thus generating sizeable profits. Typically, a high frequency trader would not hold a position open for more than a few seconds. High frequency trading is characterised by complete automation, low margins, rapid and repeated stock turnover, and little or zero overnight exposure. Hostility towards HFT In an interim report published last month, the Kay Review of UK Equity Markets and Long-Term Decision Making noted a 'hostile' tone in submissions regarding HFT. The majority of respondents to the Review rejected the notion that HFT increases liquidity and reduces price volatility. They asserted that overall volatility had not been reduced and doubted the liquidity that high frequency trading claimed to provide was real. A respondent from insurance company Aviva commented: "While some argue that spreads have reduced as a result of this activity, in reality the extent and depth of liquidity they really represent is questionable." Despite the hostility towards HFT, very few suggestions were made to the Review about how the volume of such trading could be reduced. One proposal was that orders, once placed, might be required to rest for a minimum period of time. Global regulation for HFT In October last year, securities markets regulators from Europe, the US, Asia and Australia committed to globally co-ordinate regulatory approaches to HFT. The European Securities and Markets Authority (Esma) last month gave Europe's national securities watchdogs two months to declare their plans for enforcing new rules on scrutinising HFT activities. Esma's rules require exchanges to make arrangements for monitoring high frequency traders and to put in place mechanisms for throttling trading activity during times of high market stress. Trading firms would be expected to assess the adequacy of pre-trade controls and IT, while investors who use algorithmic trading strategies would be required to have appropriate governance procedures in place for developing, buying and testing the technology. Meanwhile, in the US, the Financial Industry Regulatory Authority is monitoring unusual trading patterns. As part of these efforts it asked broker dealers and members of exchanges to hand over details of their strategies and, in some cases, the software code of their algorithms. In 2010 the regulator fined Trillium Brokerage Services $2.3 million for 'layering' markets with a high volume of false orders in 2006 and 2007. Sweden's securities regulator, Finansinspektionen (FI), has conducted an investigation into HFT and found it does not pose a threat to financial stability in that country. The survey stated: "The investigation shows that the negative effects related to high frequency and algorithmic trading are limited. It is apparent that trading has undergone a transformation, and to some extent deterioration, but most parties believe that this is due to multiple factors and not just faster, more computerised trading techniques. However, there is considerable concern that the market will be subject to greater abuse, and FI believes that this concern must be taken very seriously." HFT is very limited in Sweden, with only three of the 24 companies surveyed by FI using HFT in their operations. However, 20 companies use different types of algorithms. A total of 22 companies said they believed unfair trading practices related to algorithmic trading and HFT were present on the Swedish market. The strategies mentioned most often included:   Spoofing/layering: a strategy of placing orders that is intended to manipulate the price of an instrument, for example through a combination of buy and sell orders; Quote stuffing: the submission of a large volume of orders to a marketplace with the intention of slowing down the trading systems of other actors or hiding one's own strategy; Momentum ignition: initiating or enhancing a trend through the aggressive placement of orders in the hope that others will follow, which creates an opportunity to reverse a position; and Last second withdrawal: the cancellation of orders at the final second of a call procedure. The concerns of Swedish market participants are echoed by their counterparts elsewhere in the world. While such doubts remain about the practice of HFT, financial industry regulators are likely to continue their examination of the strategies and their potential for heightening risk. Please click here to return to the  Risk in the Market  homepage This article was written by Heather McKenzie http://misys.com/misysblog/2012/q1/emotions-run-high-over-hft.aspx http://misys.com/misysblog/2012/q1/emotions-run-high-over-hft.aspx Fri, 16 March 2012 13:48:00 Suzanne McLaughlin http://misys.com/misysblog/2012/q2/sibos-focuses-on-otc-clearing-risk.aspx The SIBOS conference in Osaka has focused a number of sessions this week on central clearing and the latest regulations in the OTC derivatives market.  In a new format "Sibos Colloquium", a spokesperson for the International Monetary Fund discussed the new swap rules and warned that, with central clearing, the risk could potentially be transferred to another entity rather than reducing the overall risk.  Another talking point was that some firms such as insurers and corporates will be exempt from the new swaps rules.  He referred to this as a "time bomb". Since the Dodd-Frank Act was agreed, various aspects of the regulation have come into force. Specifically regarding swaps, on 9 July 2012 the CFTC designated the swaps that will fall under its jurisdiction, including: interest rate and other monetary rate swaps; CDSs based on broad indexes; currency swaps, options and non-deliverable forwards. But for security based swaps, they would fall under the SEC's control including: narrow index credit defaults and total return swaps based on single or few securities; debt derivatives called yields and security futures instruments. The announcement of these definitions established the start of the race to comply. Firms had already been mulling over a previous announcement in April that defined who should register and what status they should apply for with particular categories based on their level of trading activity. There is still much debate over these definitions and the exemptions mentioned above, with quite a bit of lobbying between various market participants and regulators.  Learn more about swap usage to comply with Dodd-Frank in our latest whitepaper http://misys.com/misysblog/2012/q2/sibos-focuses-on-otc-clearing-risk.aspx http://misys.com/misysblog/2012/q2/sibos-focuses-on-otc-clearing-risk.aspx Wed, 31 October 2012 12:17:00 http://misys.com/misysblog/2012/q2/global-transaction-banking-survey-2012.aspx Nearly half of banks are planning to offer a mobile banking solution to their transaction banking clients within the next 12 months.  That's according to our Global Transaction Banking Survey 2012 published by Finextra today. The survey also found that the days of having separate business units responsible for cash management , payments and trade finance are well and truly over.  90 per cent of banks have created a transaction banking group or plan to in the near future. Other highlights include some interesting trends in supply chain finance, the take-up of the SWIFT/ICC Bank Payment Obligation instrument, and strategic investment priorities for the next three years. This is the third survey Misys has conducted with Finextra evaluating the state of the global transaction banking sector.  This year's survey received 105 responses from 70 different financial institutions. Banking groups with multiple responses were often represented by respondents from different country operations. Download the full survey for free here. http://misys.com/misysblog/2012/q2/global-transaction-banking-survey-2012.aspx http://misys.com/misysblog/2012/q2/global-transaction-banking-survey-2012.aspx Mon, 29 October 2012 15:13:00 http://misys.com/misysblog/2012/q2/closing-the-gap-between-home-and-office.aspx Apple product launches aren't what they used to be.  It's not that the company's new smaller-format iPad and the latest version of the iPhone don't contain great new features.  It's just that we now have many more competing devices to choose from.  There's no shortage of 'exciting' product launches in the mobile market anymore.  As these devices have become more ubiquitous, we have forgotten just how groundbreaking the first iPhone was. Technology that was unthinkable a few short years ago is now in more back-pockets and handbags than the humble PC could ever dream of. It's significant that it was Apple, a personal computer manufacturer, that made this breakthrough.  It used to be the case that the technology we had access to in the office was always far superior to the computers, phones, and internet we had in our homes.  RIM's Blackberry seemed to be reinforcing this trend.  Then along came the iPod, iPhone, iPad and a whole host of competitors.  Even home broadband and public wireless networks can often outperform the heavily burdened networks corporates use today. This shift has raised our expectations and left us less tolerant of companies that don't use online and mobile technology to make our lives easier - particularly if that company in question is our employer.  Some banks have realized this and are piloting mobile services targeted at us as corporate users for the first time.  This offers the prospect of closing that gap between retail and corporate online/mobile banking.  The gap needs to be closed urgently.  Corporate treasurers are already asking why they are being asked to pay for corporate online banking services from the 1990s when, as personal customers, they are given 21 st century banking for free. Our free whitepaper 'The Nuances of Corporate Mobility, explores the challenges banks will face when they start to close this gap.  It explains why it isn't as simple as rebranding an existing retail system.  Download our whitepaper here. Returning to the theme of product launches, Misys has launched today its own mobile banking solution products designed specifically for corporate banking - Mobile for Cash Management and Mobile for Trade Services .  Read more on our product here . http://misys.com/misysblog/2012/q2/closing-the-gap-between-home-and-office.aspx http://misys.com/misysblog/2012/q2/closing-the-gap-between-home-and-office.aspx Mon, 29 October 2012 11:33:00 Misys http://misys.com/misysblog/2012/q2/misys-@-sibos.aspx It's less than a week before SIBOS 2012 opens in Osaka and we are looking forward to welcoming conference delegates to our stand (3C06).  It's an exciting time for the new Misys and we'll be taking the opportunity to make a number of important announcements across our portfolio of banking and capital markets  products. Book a meeting with us at SIBOS - Meet Misys at SIBOS Regulation and compliance Our customers are feeling the burden of regulatory pressures and complying with industry standards.  Misys' long history and global reach means we're in a unique position to help smooth the process of complying with today's growing list of regulations and standards, whether they be payment standards, such as SEPA, SWIFT, ISO20022 or OTC derivatives and risk controls such as Dodd-Frank and BASEL III.  Many of these cut across multiple areas within our customers' businesses making our experience across a broad portfolio invaluable.  Misys Global Risk Launch At SIBOS, we'll be announcing the launch of Misys Global Risk (MGR), a new generation of collaborative risk management.   It has been designed as a modular solution that combines risk and finance and is helping achieve short-term regulatory compliance without having to compromise on long-term strategic enterprise risk management goals. Read more about MGR here. Payment Networks We'll also be announcing the latest go-live for our payment solution, Misys Payment Manager (MPM), highlighting our expertise in transitioning banks onto local, regional, and global payment networks. Regulation and Standards Whitepapers available to download: Read about the SWIFT's Bank Payment Obligation (BPO) standard from a technology perspective in our whitepaper here. Read about the very latest evolutions in Dodd-Frank with our "Swaps definitions and central clearing whitepaper" The introduction of central clearing has greatly increased collateralization.  Read about how collateral management has evolved to meet these new market challenges in  "Collateral management in the Front Office" Reducing IT and systems complexity Disparate and more complex systems combining with regulatory pressures are creating an urgent need for our customers to simplify their IT infrastructure and gain a clearer, consolidated view of their businesses.  Our solutions address these needs across our customers' businesses, whether that be streamlining their payment systems with our payment services hub (MPM), or improving  business agility through improved decision making with a single view of positions, exposure and risk across asset classes and trading systems. Global Transaction Banking Report 2012 This theme features prominently in this year's Global Transaction Banking Report, due to be launched on our stand by Finextra.  We'll be hosted a panel discussion on Monday morning and handing out free copies of the report from our stand all week.   Customer service and 24x7 solutions delivered globally Our customers are focused on winning business by offering the best customer service.  Misys is helping them in a number of areas.  For Treasury businesses, Kondor+ e-Trading system empowers branches and customers while ensuring transparency and control with a lower cost per trade and TCO.  Our Trade Services solutions offer advanced workflow management and SLA dashboards to support the global processing of trade transactions across time zones, enabling banks to offer clients true 'follow-the-sun' services.  Launching mobile services for Transaction Banking Our mobile and online solutions for transaction banking help banks meet the growing demand for services that match those available to retail customers.  But the solution isn't as simple as porting a retail service onto the corporate service.  At SIBOS we'll be launching our new mobile products based on our award-winning corporate online solutions.  Tim Tyler will be giving live product demonstrations and introducing his new whitepaper, 'The Nuances of Corporate Mobility'. Download 'The Nuances of Corporate Mobility' from here. Gamification - what does it mean for banks? Misys is also helping our customers embrace social media in ways that add valuable new services and help them cross-sell to their customers.  One area we are developing is a solution for gamification.  Alex Bray will be available on our stand at SIBOS to share his insights on how banks can use gamification to engage more closely with their customers. Read more about gamification in our whitepaper here . http://misys.com/misysblog/2012/q2/misys-@-sibos.aspx http://misys.com/misysblog/2012/q2/misys-@-sibos.aspx Tue, 23 October 2012 09:46:00 David Dixon http://misys.com/misysblog/2012/q2/sefs-the-swap-hubs.aspx The new market structure is already beginning to form. A vast number of businesses are hoping to take advantage of the need to trade swaps electronically by launching swap execution facilities (SEFs), trading venues that will facilitate execution from the start of 2013. The SEFs are separated into serving either the dealer to client or dealer to dealer, with a few able to offer both. With over 50 organizations pitching to be a SEF, the market will be competitive but in all likelihood there will be a rapid shakeout. The situation is not dissimilar to that of Europe following the launch of MiFID in 2007, when new multilateral trading facilities were able to compete with incumbent exchanges for a share of equity trading. Despite the shift of a significant amount of liquidity away from the traditional venues, mainly from Europe's most liquid market the London Stock Exchange, four years later only one of the twenty plus MTFs that launched have made a profit, Chi-X Europe. It did this after becoming the largest single market in Europe with around 18% monthly market share by volume traded (according to Thomson Reuters). The OTC market supports a comparison with equities, but it is a far less liquid market. The number of OTC trades done daily is in the tens of thousands. If there are 50 firms looking to set up a SEF it seems unlikely that they can be supported, especially as the collateral requirements for OTC trades will be reasonably heavy, which is more likely to decrease liquidity.  The winners in this contest are likely to be the large firms with a listed derivatives base and clearing houses, which will allow firms to offset margin from both listed and OTC derivatives trades. Both CME and Bloomberg are well tipped for success. The CME seams to be outmanoeuvring other contenders with the planned launch of interest rate contracts in November and has the support of a number of market makers. FXAll, a foreign exchange market, and MarketAxess the bond trading platform both have successful networks for trading cash products that could be extended to the derivatives market. Download the full whitepaper - Swap definitions and central clearing http://misys.com/misysblog/2012/q2/sefs-the-swap-hubs.aspx http://misys.com/misysblog/2012/q2/sefs-the-swap-hubs.aspx Thu, 18 October 2012 11:26:00 http://misys.com/misysblog/2012/q2/otc-clearing-–-the-challenge-of-integration.aspx In our earlier posts on the changes within the OTC derivatives market, we looked at the weaknesses behind the changes , the key stakeholders and their roles and the implementation of the regulations . But what do all these changes mean for the banks? Their challenge is to integrate their existing front-to-back solution to other platforms.  Within the OTC clearing framework, that involves connecting with new intermediaries such as other banks, clearing members/brokers and CCPs. Top of the agenda will be topics such as: Connectivity Connectivity relates to three specific aspects. The first is the ability for banks to connect with their capital markets solution and an affirmation platform. This interface is essential as the affirmation platform (within the OTC clearing model) deals with dynamic post-trade variables such as trade matching, affirmation, confirmation and trade reconciliation. Plus, they also send trades to CMs and CCPs. Secondly, connectivity also gives banks the ability source position and trade information to capture all the data that has a bearing on how the instrument is traded. And finally, it also means the requirement to connect to CCPs, which is vital for the exchange of flows, such as a request for collateral or for valuation details. Calculation engines  All clearing members and CCPs are required to calculate initial margin (IM). But banks find it difficult to re-compute the IM requirement and therefore must follow this process: Clearing members and CCPs need a system to calculate IM on an intra-day basis (based on VaR methodology with all cleared transactions included in the IM calculation) and a separate collateral service to assess the collateral available. The different is calculated to derive a margin call instruction or novation.  The same workflow also applied to the End of Day (EOD) process.  Configurable rule-based workflow  The smooth integration between internal and external services is essential; therefore a configurable rules-based workflow is needed.  Flexibility of this workflow is essential as deal data comes form every CCP and evolves over time, so eligibility checks must be undertaken.  Clearing members find it a challenge to incorporate this level of flexibility into the control definition:  If all controls are passed, the trade is accepted for clearing and the CCP proceeds with the novation If one of the controls fails, the trade is not accepted for clearing or follows a different workflow  Reporting  The whole point of the OTC Clearing Reform is transparency.  The system must deliver the ability to report on all data points, captured at a contract, trade and positional level.  These reports should be run in real-time to reflect the most up to date view of positions and trades within the system. That way, they can be linked to margin and cost of carry reports. The time to act is now  This transformation of the capital markets is happening rapidly.  With deadline of the 31 st December 2012 looming (as set by the G-20), it is essential that the players have their preparations well under way.  This OTC Clearing series was serialised for The Future of Finance by Sally Ormond from our white paper, "OTC Clearing - Evaluation of the EMIR and Dodd-Frank regulations and their impact on IT" written by Michel Dorval. The full OTC Clearing white paper can be  downloaded here .   If you have any questions on the subject, or would like to learn more about how Misys can help you address this challenge, please contact our subject expert  Sebastien Jacquet . http://misys.com/misysblog/2012/q2/otc-clearing-–-the-challenge-of-integration.aspx http://misys.com/misysblog/2012/q2/otc-clearing-–-the-challenge-of-integration.aspx Mon, 29 October 2012 11:45:00 http://misys.com/misysblog/2012/q2/otc-derivatives-stakeholders-spotlight.aspx Our first post in this series on the weaknesses within the OTC derivatives market looked at the changes that are to be brought into effect following the 2009 G-20 Summit. The G-20 leaders agreed that to avoid a repeat of the US Sub-prime catastrophe, the trading of OTC derivatives should move away from the current bilateral arrangements between parties, towards recognised exchanges or trading platforms where appropriate. They also agreed that all standardized OTC derivatives should be cleared through a central counterparty should be reported to trade repositories to reduce systemic risk and enhance transparency. To achieve this, a number of stakeholders have to be brought together. In this post, we'll look at the different players within the CCP workflow and their roles. Standardized OTC Derivatives: The Players There are 5 key stakeholders in standardized OTC derivatives: Central Counterparty (CCP) The CCP carries out two main processes: Clearing of market transactions (identifying the obligations of the parties on either side of the transaction) Settlement of market transactions (this happens when the final transaction of securities and funds occur) This intermediary role benefits both parties to a transaction because the CCP bears most of the credit risk. Currently, there are about a dozen CCPs clearing OTC derivatives based on interest rates, credit, equity and commodities. The CCP can be owned by participants or monitored by the regulator and may differ on factors such as margin requirements, infrastructure or the type of products cleared. Affirmation Platform (AP) The Affirmation Platform provides post-trade execution for confirming and matching trade details.  Details of the trade are input by the party executing the trade (e.g. banker or broker) and affirmed by the client. A single record of the trade details then becomes the legal confirmation of the trade and remains in the central repository. In addition, they also enable trades to be sent to other stakeholders such as CMs, CCP and Trade Repositories as necessary. Trade Repository (TR) After the financial crisis highlighted the lack of transparency, regulators set up the Trade Repositories to centrally collect and maintain records of OTC derivatives' transactional data. This enhances transparency and reduces systemic risk as regulators can see a firm's underlying position and exposure from a central vantage point. Clearing Members (CM) Due to strict membership rules, such as an initial capital requirement, not all clients can become members of a clearing house. Therefore, CMs act as intermediary between buyers and the CCP for all post-trade functions. Trading Venue To comply with the new rules, all standardized instruments must be traded electronically. In Europe, a trading venue can be a regulated market (e.g. London Stock Exchange), a multilateral trading facility (e.g. BATS/Chi-X), or an organised trading facility. In the US, the Swap Execution Facility (SEF) provides the required platform for buyers and dealers to trade OTC cleared swaps electronically. Currently, there are no approved SEFs for OTC derivatives, but this is being reviewed. The following diagram shows how all these stakeholders' roles fit together. Non-standardized OTC derivatives will also have to be reported to trade repositories. But they will also be subject to risk management procedures and frameworks to measure, monitor and mitigate operational risk and counterparty credit risk. So far we have seen why these stricter measures are necessary and the parties that need to be involved to ensure they are adhered to. In our next post we will look at how these new regulations are being adopted in the US and Europe.    http://misys.com/misysblog/2012/q2/otc-derivatives-stakeholders-spotlight.aspx http://misys.com/misysblog/2012/q2/otc-derivatives-stakeholders-spotlight.aspx Mon, 24 September 2012 08:30:00 http://misys.com/misysblog/2012/q2/the-weakness-within-otc-derivatives-markets.aspx The credit crunch of 2008 exposed weaknesses within the Over-the-counter (OTC) derivatives market: the lack of transparency, counterparty credit risk and operational risk. The resultant potential of one counterparty default cascading into defaults for other parties was graphically illustrated with the US Sub-prime problems that developed into a global financial crisis. This series of blog posts looks at the changes coming to the world of OTC derivatives and how the key players will be affected. Changes are coming OTC derivatives account for almost 95% of the derivatives market. Considering the catastrophe of 2008 and its far reaching consequences, it was clear that something needed to be done to stabilise this market to guard against the inherent risk element attached to it. In September 2009, at the G-20 Pittsburgh Summit, the leaders of the world's 19 biggest economies reacted by agreeing that   "All standard derivative contracts should be traded on exchanges or electronic trading platforms…and cleared through central counterparties by end 2012 at the latest." But why is it so volatile? Let's start by looking at the current way of doing things. OTC derivative contracts aren't traded on an exchange such as the CME; they are privately negotiated between two counterparties. These contractual relationships can last from a few days to several decades and can involve counterparty credit risk as each builds up claims against the other. This counterpart credit risk can be managed over time through clearing: either bilaterally or via central clearing. Bilateral Clearing Bilateral clearing is commonplace for OTC derivatives. During this process collateral is used as insurance against excessive credit exposure and the trade is negotiated privately between the dealer and the client. All processing during its lifetime is the responsibility of these two parties. Throughout that time, OTC derivatives need a lot of manual intervention and, as we've seen countless times before, this often leads to high levels of operational risk. The result is a web of counterparty exposures between different participants with complex movements and the risk of a potential domino effect if one dealer, for example C as shown in figure 1, defaults.  Overcoming the issues It therefore became apparent that a different approach was needed to avoid (or at least reduce) this risk element. This thinking lead to the idea of a Central Clearing Counterparty (CCP), which would facilitate the clearing of OTC derivative trades. The trade is negotiated between dealer and client and then handed over to the CCP for clearing. By sitting between the two counterparties, the CCP will help manage the risk present in bilateral clearing. The way ahead Earlier we mentioned the agreement reached at the G-20 Summit. This has been filtered into the Dodd-Frank Act in the US and the European Market Infrastructure Regulation (EMIR). But before this can be implemented (this will be explored in the third post in this series), five key stakeholders are required to ensure the system works. Our next post will look at the roles played by these stakeholders in standardized and non-standardized OTC derivatives. http://misys.com/misysblog/2012/q2/the-weakness-within-otc-derivatives-markets.aspx http://misys.com/misysblog/2012/q2/the-weakness-within-otc-derivatives-markets.aspx Mon, 17 September 2012 12:26:00 http://misys.com/misysblog/2012/q2/could-this-be-the-end-of-manual-processing.aspx Reducing risk is at the top of the wish list when it comes to handling straight-through processing. But the icing on the cake would be a single platform for lending solutions that would also considerably reduce total cost of ownership and gain significant improvements in operational efficiency. That is precisely what can be achieved with Misys' Loan IQ . This powerful platform allows users to reduce or eliminate manual processes. This improves risk management and regulatory compliance by using real-time exposure reporting across a number of lending scenarios. By offering a single view of all lending lines, businesses will be able to improve their operations and satisfy customer demand for transparency. Plus, it will also help make future compliance issues easier to deal with. Used in over 60 worldwide businesses - including leading global financial institutions - Misys' Loan IQ processes more than half the world's loan trades and one third of the world's syndicated loans. This post was written by Sally Ormond. http://misys.com/misysblog/2012/q2/could-this-be-the-end-of-manual-processing.aspx http://misys.com/misysblog/2012/q2/could-this-be-the-end-of-manual-processing.aspx Fri, 07 September 2012 00:00:00 http://misys.com/misysblog/2012/q2/risk-management,-compliance-and-the-human-touch.aspx Risk management is at the heart of the modern banking operation. Financial institutions (FIs) are seeking increasingly sophisticated new tools to enable them to improve transparency across the business and manage their exposure to risk more effectively.  Banking and securities regulators have made it clear that they will focus strongly on risk and compliance functions during inspections and in determining capital requirements; and this focus will not go away. Risk management can no longer be reactive and retrospective; risk managers need to be able to operate proactively. In the light of this, FIs are collectively spending billions on increasingly sophisticated software, as their current risk systems struggle to keep up with the demands being placed on them. Indeed, it sometimes seems like a very expensive game of 'catch-up'. And it's not just the FIs but also suppliers like Misys who are investing in this area. Surely this means that market and company issues caused by inadequate risk management and irresponsible trading can one day be eradicated through the services of the 'new age' of risk and compliance systems. Well,  perhaps not totally.  The banks cited in recent allegations of LIBOR manipulation are among the largest in the world and must have invested very heavily in the best risk management systems available. Unfortunately, no matter how much they spend, there is one type of risk they can't hope to eliminate completely ;  the 'human' element. In this particular instance, with LIBOR reporting basically an 'honour' system for the banks involved (albeit tracked for unusual movements) it was always going to be open to potential manipulation by individuals within contributing firms, seeking personal or corporate advantage. The 'human touch' cannot be removed from business. FIs are run by people. Systems can go a long way in helping to minimise risk across the enterprise, but how do you design a system that can prevent the calling in of a favour?  This post was written by Sue Dobson. http://misys.com/misysblog/2012/q2/risk-management,-compliance-and-the-human-touch.aspx http://misys.com/misysblog/2012/q2/risk-management,-compliance-and-the-human-touch.aspx Wed, 15 August 2012 15:05:00 http://misys.com/misysblog/2012/q2/swaps-definition-takes-on-the-world.aspx By David Dixon, Product Manager for Misys' Summit FT Earlier this month, the U.S. Securities and Exchange Commission (SEC) and the U.S. Commodity Futures Trading Commission (CFTC) released the long-anticipated definition of a swap. As expected by the majority of industry participants, the SEC and CFTC sided with the wording in the Dodd-Frank Act. Although there were no big surprises in the content of the announcement, banks and financial institutions still have a huge amount to contend with on the regulatory front - including registering themselves, complying with compensation rule changes, establishing living wills and of course determining changes to their business strategy - in addition to the newly outlined definition. It may seem that the software changes necessary for this one piece of Dodd-Frank are a small part of the overall picture. However, having the right technology in place plays a big role in being compliant and running an efficient business. Industry Implications The compliance clock started ticking on July 11, 2012, when the definition was announced to the public, but the onset of the regulations was realized long ago. From our experience, and speaking with our clients, the most difficult element of complying with the new definition is the short timeframe - just 60 days to implement in some cases - setting the deadlines as early as this September. Much of what banks and financial institutions need in terms of software solutions is available today, however to implement and to test these systems takes more time than is currently at hand. In addition, there are elements of Dodd-Frank to come that will affect areas of the solution previously implemented, e.g. trade reporting will come into effect in September, but the requirement to use legal entity identifiers (LEIs) will come to fruition at the end of the year. This adds additional pressure on firms and further complicates the software update process. Prioritizing Updates Over the next few months, there will be a huge scramble in the industry, as a multitude of regulations go into effect at different times before the end of the year. The process is akin to buying the latest computer and almost immediately a newer, faster version is available. Similarly, deciding at what time to implement new compliance software when you know there are future regulations, bringing additional changes, adds a level of complexity to any decision. Firms have to draw the line somewhere and the ultimate decision will be made based on different implications at each organization. In addition, as the deadline is fast approaching, short-term fixes have to be more tactical, while strategic solutions will be implemented down the line. It's not possible to get everything done at once and firms have their plates full. Global Impact Although the SEC and CFTC's announcement concerns only Dodd-Frank and the U.S. market, the implications are global. As there is a general drive for regulatory harmonization across the world to avoid potential regulatory arbitrage, it would be safe to assume that the rules will look similar across the globe. Therefore, banks and financial institutions need to be prepared to handle similar regulations in other regions. U.S. banks are well advanced in their planning, and European organizations are close behind, however, in Asia, where there are a lot of different jurisdictions, regulations and deadlines are less certain. We still continue to see little interest regarding the SEC/CFTC definition from firms in Asia. This firstly raises the issue of whether businesses will move to Asia as a consequence of less regulation in that area. The second concern is whether Asian firms are prepared for when the U.S. regulations will take effect. These are big issues that banks will need to contend with over the next few months. But there is a third consideration. Even before Dodd-Frank there was pressure to globally consolidate software systems; with Dodd-Frank this continues in order to get the benefits of consolidated reporting, increased globalization and to allow greater risk controls. If firms update to comply with this definition in a hurry, they risk ending up with ad-hoc systems to meet the requirements of various regions versus deploying a unified and efficient infrastructure. Originally published by  http://tabbforum.com     http://misys.com/misysblog/2012/q2/swaps-definition-takes-on-the-world.aspx http://misys.com/misysblog/2012/q2/swaps-definition-takes-on-the-world.aspx Wed, 01 August 2012 14:02:00 http://misys.com/misysblog/2012/q2/olympic-risk-don't-forget-the-basics.aspx Apologies - you may have thought that RITM was the one place where you could escape Olympic fever. Wrong! The big day has arrived; the culmination of some seven years of preparations and a budget in excess of £9 billion. The services of the brightest and best have been hired to design and build world-class sporting venues; support for these venues is being provided through an army of 70,000 volunteers, with a further 8,000 Londoners acting as Ambassadors for their city, to ensure a warm welcome to visitors.  It goes without saying that a massive security operation is involved. Contingency measures have been put in place to make sure that athletes don't fall foul of London's overburdened transport system, and so miss their events; measures have even been taken to ensure that details of Danny Boyle's opening ceremony remain a secret. Finally, the weather has morphed from the constant rain to which we have been subject since April to mercury-busting temperatures and sunshine (well, for the south-east at least). Lord Coe surely must be feeling that the gods are smiling on this event. On Wednesday, the sporting events kicked off with two women's football matches. Happy families were shown in the sunshine at the Millennium Stadium, cheering Team GB on to victory against New Zealand; while at Hampden Park.....the South Korean flag was displayed in a video introducing the North Korean team, prior to their match with Colombia.  Cue for the entire North Korean team to walk off the pitch. Of all the flags to confuse, given that the two Koreas are still technically at war......'D'oh', as Homer Simpson would say! 'It wasnae us. It's nae our fault', jested Nicky Campbell, Radio 5 Live presenter, on hearing that officials at Hampden Park had received a video package from organizers, LOCOG and had 'just run it.' Perhaps this 'error' is a reminder that the 'process' is becoming bigger than the 'human' contribution; after all, a double-check of the video at Hampden Park could have pre-empted a major blunder. My son had a 'flags of the world' jigsaw when he was 8 - he could have spotted this; and I'm sure there must be a flag app out there to make it even easier. So let's not focus too much on the 'big picture' or forget the basics in our quest to manage the risk around us - whether it's Olympic risk or any other risk. (And, in case you were wondering, I'm not an Olympics basher - I'm really looking forward to the events of the next few weeks!) This post was written by Sue Dobson http://misys.com/misysblog/2012/q2/olympic-risk-don't-forget-the-basics.aspx http://misys.com/misysblog/2012/q2/olympic-risk-don't-forget-the-basics.aspx Fri, 27 July 2012 11:09:00 http://misys.com/misysblog/2012/q2/new-misys-launch-plus-30.aspx  The 'new' Misys came into being on 1st June 2012, with the amalgamation of 'old' Misys and Turaz - a brand which had existed for just four months, but was in fact the new face of the well-established Thomson Reuters' Risk Management systems such as Kondor+.  I was fortunate enough to be invited to the launch event and, not being an employee of either camp, could enjoy the proceedings as a neutral observer. Things had moved along quickly. The acquisition of Misys by Vista was given the green light in April; that left just  5 weeks before launch to define, at least in high level terms, the business and product strategy that would be represented by the new  (and as yet unnamed) brand, as well as to create the physical identity of said brand. The launch event in Paddington on June 1st certainly had the feeling of a momentous occasion: a huge auditorium, packed with employees from both 'sides'; and lots of very slick multi-media which interspersed the launch proceedings with comments from employees around the world (both pre-recorded and 'real-time' via the live 'Twitter' wall). There were stirring presentations in situ from new CEO Bret Bolin as well as a pre-recorded interview with Nadeem Syed, president and COO. There were real-time links to international offices to involve people there in the proceedings too - although some of these links did not run quite as smoothly as might have been hoped, to the amusement of the audience in London! The main focus, however, was on the countdown to the unveiling of the new company brand, marked by the pressing of a large red button by Bret Bolin. The buildup was all very exciting - even for a 'neutral' like me! Then, after the 'button moment', what did everyone think? Day 1 of the new Misys -how did it feel? Well there was not so much immediate reaction (good or bad!) from the audience in Paddington. Despite cajoling and repeated requests for questions and comments from the Misys team (Tom Kilroy, Mika-John Southworth and Melanie Hill - who all did a magnificent job in presenting the event), response was a little muted. Now, 30 days on, the dust has settled and it's back to business as usual. New contracts have been signed (Bank of Beirut) and just over two weeks after the launch, more than 500 delegates at the European Customer Conference in Lisbon witnessed the unveiling of Misys'  integrated solution strategy, with their first glimpse of Misys Global Risk, a combination of Misys and Turaz risk management and control solutions. Attendees were shown an example of the new integrated solution strategy in action as a complex cross asset trade was seamlessly processed using a combination of Misys Summit, Kondor+ and Sophis RISQUE. And this demonstration perhaps says more about the new Misys than any launch-time comments could. Over the last 30 days, having listened to the strategies, seen the proposed product roadmaps and been introduced to the new Misys senior management team - customers, partners and employees have now also witnessed how the new stronger Misys can and will work in practice. To paraphrase Nadeem Syed's words from the launch, they have seen how 1 + 1 really can equal 3!  This post was written by Sue Dobson http://misys.com/misysblog/2012/q2/new-misys-launch-plus-30.aspx http://misys.com/misysblog/2012/q2/new-misys-launch-plus-30.aspx Sun, 01 July 2012 05:00:00 http://misys.com/misysblog/2012/q2/the-drivers-of-cva.aspx This is the 3rd in our series of posts on CVA. THE DRIVERS OF CREDIT VALUE ADJUSTMENT (CVA) In our previous posts, we looked at  CVA as a concept  and how it is calculated by banks. But what is it that has forced the banks to make these calculations - what are the drivers of CVA? There are 3 main types of drivers that are forcing banks to calculate CVA, which can be classified as: Drivers of CVA Accounting as a driver It was the implementation of fair value provisions that became the first main driver of the CVA concept. These were driven by international (currently IFRS 9) and US (currently ASC820) accounting standards designed to set out the requirements for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. In a nutshell, that meant that firms' accounting departments had to reflect credit quality in the fair value measurement resulting in a rational and unbiased estimate of the potential market price of a good, service, or asset. This would take into account various objective and subjective factors, such as:   Any gains and losses from changes in fair value are recognised on the P&L. Regulation as a driver The introduction of Basel II brought forth standards and regulations regarding how much capital financial institutions had to put aside to reduce the risks associated with its investing and lending practices. However, these rules and regulations only covered default risk and not CVA risk. In response to this, the Basel Committee on Banking Supervision introduced, within the Basel III framework, a new capital charge for potential mark-to-market losses associated with any deterioration in the creditworthiness of a counterparty. These new guidelines presented both a standardised and advanced CVA charge, which we will look at in more detail later. Active counterparty risk management It could also be argued that the crisis and resultant credit crunch of 2008 was also a key driver of CVA. It soon became apparent that CVA losses dominated default losses during the crisis, prompting front offices to realise that better quantification, pricing, and management of their counterparty risk was crucial. As a response, some banks created specific CVA desks to manage CVA P&L and to collect charges from the originating desks in return for insulating them against counterparty default losses. Due to the possibility of the total CVA book representing a large part of the bank's P&L, it was important to hedge the overall CVA, therefore avoiding CVA uncertainty and its resultant negative impact on the bank's profitability. Basel III's response Earlier, we touched on the new guidelines presented under the Basel III framework that were introduced by the Basel Committee on Banking Supervision in response to the financial crisis. Designed to strengthen the capital requirements for counterparty credit exposures that arise from bank's derivatives, repo and securities financing activities, it also provided incentives to move  Over The Counter (OTC) derivative  contracts to central counterparties. This introduced a new capital charge for potential mark-to-market losses associated with the deterioration in the creditworthiness of counterparty (CVA risk) applications to OTC derivatives. When calculating the CVA capital charge, banks either take the standardised or advanced approach. However, to adopt the advanced CVA approach, the bank must have regulatory approval to estimate the exposure-at-default of OTC derivatives using the Internal Model Method (IMM) approach. It must also have approval for a market risk internal model covering the specific interest rate risk of bonds. It is worth noting that the measurement and hedging of CVA is starting to have an effect on the markets. For example, in July 2011, the sovereign-credit default swaps market was extremely volatile and market participants were concerned that the Basel III capital charge for CVA could cause more problems in the market. CVA strategies So far, we have looked at the concept of CVA and the key drivers behind it. But how do banks deal with it? Our next post will take a look at the different CVA strategies that are available to the banks. http://misys.com/misysblog/2012/q2/the-drivers-of-cva.aspx http://misys.com/misysblog/2012/q2/the-drivers-of-cva.aspx Wed, 04 April 2012 10:00:00 http://misys.com/misysblog/2012/q2/the-strategies-of-cva-(credit-value-adjustment).aspx This is the fourth post in our series on CVA, which will explore the different CVA strategies available to banks.  THE STRATEGIES OF CREDIT VALUE ADJUSTMENT Following the financial crisis, intense scrutiny of counterparty risk systems and practices identified deficiencies that have resulted in a heightened focus on the need to quantify and manage counterparty credit risk accurately. This has resulted in an accelerated shift from passive to active management of counterparty risk. The change in how institutions manage default exposure is being driven by the on-going adoption of more sophisticated market practices and significant advances in technology and analytics. CVA strategies When it comes to hedging or trading CVA, banks will have different approaches according to their requirements, such as: The size of the derivatives operation Bank strategy It is imperative that a clear consensus is in place at a senior level when determining the degree and sophistication of CVA management, as CVA projects cross traditional business lines and boundaries. To achieve that clarity, it is useful to categorise a bank's CVA strategy into 4 stages, with sophistication and cost increasing at each stage. The four stages of CVA strategy Stage 1 - Measure The least sophisticated of the four strategies, a CVA measuring capability is created to calculate and aggregate CVA risks. The principal users of this function will be the accounting and risk management departments and are used to fulfil compliance obligations under accounting and regulatory standards. Stage 2 - Advise Building on stage 1, as well as measuring CVA, the bank will also advise its trading departments on CVA-related risks, such as: Setting position limits to include CVA Traders being given minimum spreads to charge on a counterparty by counterparty basis Stage 3 - Hedge Increasing in sophistication, at this level the CVA is transferred from the trading desks to a dedicated CVA desk, potentially through a one-time charge to the trading desk. Responsibility for managing the CVA P&L and, for example, hedging it through the CDS market, passes to the CVA desk. Stage 4 - Trade At its most sophisticated, a bank's CVA strategy will see the CVA desk becoming a profit centre, seeing the bank not only hedging its own CVA risk, but also actively taking CVA positions. The choice made will largely depend on: The size of the bank The scope of its derivatives book Its strategic direction The regulatory and accounting standards that are in place For many banks, the implementation of CVA at stage 1 will be sufficient as it offers compliance with regulatory and accounting standards. Stages 3 and 4 are more likely to be adopted by the largest derivatives players. Due to the complex modelling techniques demanded by CVA, immense processing power is required, which has led to technological advances to meet the need for fast, accurate and flexible exposure measurement and management.  These analytical tools enable banks to carry out simulation-based, near real-time computation of incremental CVA, and active hedging of CVA risk. Building on an existing risk infrastructure Once a CVA strategy has been agreed, the bank must then identify the main gaps in data management, models, technology and performance that need to be addressed if their goal strategy is to be achieved. The next post in this series on CVA will look at the data requirements of CVA solutions. http://misys.com/misysblog/2012/q2/the-strategies-of-cva-(credit-value-adjustment).aspx http://misys.com/misysblog/2012/q2/the-strategies-of-cva-(credit-value-adjustment).aspx Tue, 17 April 2012 09:55:00 http://misys.com/misysblog/2012/q2/basel-iii-leverage-ratio-causes-concern.aspx The Basel III leverage ratio is emerging as a critical issue, said Richard Barfield, a director at consultancy firm PwC. Mr Barfield's comments came after the Basel Committee reported data indicating major international banks would have fallen significantly short of Basel III capital rules if they had been in effect last year. The data was based on a  monitoring exercise  undertaken by the Committee. The 212 banks that participated in the study included 103 Group 1 banks (those that have Tier 1 capital of more than €3 billion and are internationally active) and 109 Group 2 banks (all other banks). While the Basel III framework sets out transitional arrangements to implement the new standards, the monitoring exercise results assume full implementation of the final Basel III package based on data as of 30 June 2011. The study found that based on the data and applying the changes to the definition of capital and risk-weighted assets, the average common equity Tier 1 capital ratio (CET1) of Group 1 banks was 7.1%, as compared with the Basel III minimum requirement of 4.5%. In order for all Group 1 banks to reach the 4.5% minimum, an increase of €38.8 billion CET1 would be required, said the Committee. The overall shortfall increases to €485.6 billion to achieve a CET1 target level of 7% (including the capital conservation buffer); this amount includes the surcharge for global systemically important banks where applicable. For Group 2 banks, the average CET1 ratio stood at 8.3%. In order for all Group 2 banks in the sample to meet the new 4.5% CET1 ratio, the additional capital needed is estimated to be €8.6 billion. They would have required an additional €32.4 billion to reach a CET1 target 7%. The leverage ratio is the ratio of Tier 1 capital to certain on and off balance sheet exposures, calculated in accordance with the methodology set out in the Basel III guidelines published in December 2010. The monitoring exercise found that under the current Tier 1 leverage ratio, 17 banks (six Group 1 and 11 Group 2) would not meet the 3% Tier 1 leverage ratio level. Under the Basel III Tier 1 leverage ratio this leaps to 63 banks that would not meet the 3% Tier 1 leverage ratio level; 36 of those Group 1 banks and 27 Group 2 banks. "The results show that the leverage ratio is starting to emerge as a critical issue. This might have gone under many people's radars as banks may hit the capital ratio (which is the main focus) but still fall short on the leverage ratio," said Barfield. "It is worrying that 36 of the 103 Group 1 banks would not have met the Basel III leverage ratio of 3% as this could lead to deleveraging in order to make up the shortfalls." Banks need to be careful to avoid a knee-jerk reaction that leads to deleveraging, which may damage their long term profitability, he added. It also raises the question as to what banks could be doing to improve investor confidence in the sector to increase the supply of capital. This is essential to ensure that the transition to Basel III does not have damaging consequences at a time of economic fragility. In its report, the Basel Committe said the treatment of deductions and non-qualifying capital instruments had affected figures reported in the leverage ratio section. "The underestimation of Tier 1 capital will become less of an issue as the implementation date of the leverage ratio nears. In particular, in 2013, the capital amounts based on the capital requirements in place on the Basel III monitoring reporting date will reflect the amount of non-qualifying capital instruments included in capital at that time. These amounts will therefore be more representative of the capital held by banks at the implementation date of the leverage ratio." http://misys.com/misysblog/2012/q2/basel-iii-leverage-ratio-causes-concern.aspx http://misys.com/misysblog/2012/q2/basel-iii-leverage-ratio-causes-concern.aspx Tue, 24 April 2012 09:54:00 http://misys.com/misysblog/2012/q2/building-a-cva-infrastructure.aspx This is the fifth in Risk in the Market's series on CVA, in which we will look at the data requirements of a CVA solution.  BUILDING A CREDIT VALUE ADJUSTMENT INFRASTRUCTURE - DATA REQUIREMENTS Our previous post looked at the  S trategies of Credit Value Adjustment     and how banks will have different approaches, when it comes to devising their CVA strategies, according to their requirements (such as size of derivatives operation). The calculation of CVA is complex and involves portfolio-wide Monte Carlo simulations of exposures and good credit risk data for all the bank's OTC derivatives counterparties. Due to previous investment in the capabilities necessary for calculating economic and regulatory capital, many banks already have in place all (or at least part) of the different elements needed to build a CVA solution. But there lies the problem - many of these elements are dispersed across different departments and a more consolidated approach is required for CVA. So what are the elements? Well, they can be broadly grouped under 3 headings: Data Analytics Reporting Data requirements In broad terms, a CVA solution needs to access the following data: The challenge faced by banks isn't generating this data. Much of it is standard input to current platforms used to calculate market and counterparty credit risk, and therefore already available: Securities data -  available from the front-office trade capture and pricing systems Static data -  is generally the same as that used by limit management solutions Market data -  can be sourced from trading and risk management systems Credit risk data -  can be sourced from systems that calculate economic or regulatory capital (especially if the bank is already using an internal ratings approach for regulatory capital) In fact, the challenge is in the form of consolidating and normalizing the data so it can be used for a centralised CVA computation. The calibration of the market data simulation models will determine whether the bank's current market data is sufficient, or whether it needs to be supplemented by historical time series. This in turn depends on how the CVA is going to be used by the bank, for example, for risk management, regulatory or derivatives pricing purposes. We'll take a look at that particular aspect in more detail in the next blog in this CVA series. However, the sourcing and cleansing of the data is only one part of the story. Dealing with missing or unreliable data What happens if the data simply doesn't exist, or it is unreliable? This can be the case for many smaller counterparties or in the case of less liquid markets. In these circumstances, it is up to the banks to either create synthetic data or apply more approximate methods if the data is deficient. To illustrate this further, let's look at a scenario where a credit spread curve is not available from market data for a smaller counterparty. In this particular situation, the credit risk could be approximated by using a probability or default equivalent for companies: With the same rating Operating in a similar business In the same geographical region The data used would be determined by each individual case; therefore, it is important that the systems in place can manage these mappings in a flexible and transparent way. As we saw in our earlier post about the  strategies of CVA , each bank will have different requirements in terms of hedging or trading CVA depending on the size of the derivatives operation and bank strategy. Therefore, their analytics requirements will also be affected by these variables. The next blog in our CVA series will look at analytics as part of a CVA solution. http://misys.com/misysblog/2012/q2/building-a-cva-infrastructure.aspx http://misys.com/misysblog/2012/q2/building-a-cva-infrastructure.aspx Mon, 30 April 2012 00:00:00 http://misys.com/misysblog/2012/q2/splitting-the-fsa.aspx By 2013 two new bodies will be born, a Financial Conduct Authority (FCA) and a Prudential Regulatory Authority (PRA). The so-called "twin peak" model has been designed with rigorous financial conduct supervision in mind, and it is unlikely that they are going to be a light touch regulators.   The PRA, who's strategic objective is to continue the promotion of stability in the UK financial system, will carry out prudential regulation on significant firms, deposit takers, insurance and some investment firms.   The FCA will carry out prudential regulation on investment firms and exchanges, IFAs, investment exchanges, insurance brokers and fund managers. The body will also conduct regulation over market players covered by the PRA.   The split will see the establishment of the Financial Policy Committee (FPC) within the Bank of England, responsible for macro-prudential regulation. Furthermore, an expert risk analysis platform is already being formulated, dubbed Analytics and Risk Technology (ART), providing the FSA and later the PRA risk infrastructure, models and data.   The FSA have stated that the shake up will aim to ensure that good regulation is created and applied consistently across international jurisdictions, stressing cooperation with fellow regulators such as the Basel Committee on Banking Supervision. The bodies will also aim to influence the significant European regulatory agenda that is currently in play.   The Financial Services Bill, which will pass the new regulatory structure into law, is currently being scrutinised in parliament. However, the proposition of a new regulatory regime was dealt a heavy blow when Hector Sants, chief executive of the FSA, announced plans to leave his post at the end of June.   Mr Sants, a man famous for giving the FSA some bite, was originally going to head the PRA. The role will now be given to Andrew Bailey a senior Bank of England official, on an interim basis, unless a surprise candidate emerges. It is likely that his replacement will have asset management or insurance sector experience rather than banking given the PRA's regulatory role.   One area of concern has been the exact details of where many of the City of London's more technical departments will slot into the new regime. It is therefore essential for firms to research thoroughly how they will be affected.   Mr Sants stressed in a statement to the Financial Times, "We would like firms not to just take the narrow perspective of what can they get away with within the rules and how long can their lawyers delay, but take the broad perspective. When the right way forward is clear, they should get on with it." Contributor: Victoria Maigrot http://misys.com/misysblog/2012/q2/splitting-the-fsa.aspx http://misys.com/misysblog/2012/q2/splitting-the-fsa.aspx Tue, 08 May 2012 00:00:00 http://misys.com/misysblog/2012/q2/launching-a-new-misys.aspx Launching a "new Misys"  Today, at 09:00 the 'new Misys' was launched, reflecting the acquisition of Misys by Vista and integration with already-owned Turaz to form the undisputed market leader for banking and capital markets software, with over 5,000 staff supporting 1800 customers across 120 countries. So with the stats out of the way, and as the dust is still settling, we asked Mika-John Southworth of Misys Marketing what the 'new Misys' will represent to its customers, employees and partners. Q:           Vista has moved quickly, but what would you say to staff and customers who may be thinking 'here we go again'? A:            I would say that today we have ended a period of uncertainty for Misys employees and customers in particular, who over the last months have seen the company linked with Fidelity, CVC, ValueAct…. and most recently Temenos. Turaz has had its own share of upheaval too, with its split from Thomson Reuters. So to all I would say: it's done! This is a positive move. Now, let's move forward! Q;           Big isn't necessarily best is it? A:            No it's not. But strength and breadth of product footprint goes a long way towards it. And with the new Misys, we can provide solutions to meet the needs of financial institutions in just about every market, segment, tier and geography. And you can't just dismiss size. We can leverage our scale to provide a unique value proposition to our customers: well-integrated, best of breed solutions capable of integrating seamlessly into the financial institution, no matter where in the world it is located; or in which part of the industry it operates. And with more than 5,000  employees, customers will have access to an unrivalled pool of expertise and knowledge of their industry. Q:           Big companies sometimes forget about the little, day to day things, don't they? A:            The new Misys will be handling the big problems and the small ones; that is the essence of our brand. We call it a 'macro to micro' approach. In other words, we can help banks and other financial institutions to achieve their strategic business and IT goals without neglecting the many incremental steps needed to get there or avoiding the resolution of day to day issues. Q:           With such a breadth of products, there must be some overlap? A:            It's a bit of a cliche I know, but the new, combined company will be stronger; and definitely greater than the sum of the two parts. The new Misys is committed to investing in and supporting all of our capital markets and banking products: we aim to protect and support the assets we have, and will be looking to leverage synergies between them, to benefit our customers. Protect, extend and innovate - that encapsulates our approach to our combined products. Q:           What about the response from customers, now that everything has been finalised? A:            The acquisition of Misys happened very quickly and followed hot on the heels of the acquisition of Thomson Reuters' Risk Management systems and subsequent formation of Turaz; so naturally we are still in the process of gathering detailed feedback from both customer sets. One thing I can say, however (and I'm paraphrasing a comment from Celent  in doing so) is that in a business environment like banking, with rapid change and very real budgetary constraints, the companies that manage to successfully push IT budgets further and remove costs are often the same companies that consolidate applications, reduce integration costs, and rationalize supplier relationships. Given that the new Misys has product breadth and depth across both the banking and trading book, and that we can draw on technology-enabled delivery models to help us to implement these quickly and flexibly, this must surely be the right direction for both our customers and ourselves to be moving in? Q:           And the response from the staff? A:            The official launch on June 1 st in London gives us the opportunity to present the vision of the new Misys to our employees. Inevitably there has been some uncertainty, but I hope that the vision we have for the company - to be known for excellence in our products and services; to continue to resolve the most complex problems facing this industry; and to continue to grow leadership in these markets - will be an exciting one for staff. This is an exciting time. After all, a broader customer base and product can easily translate into new opportunities for the teams from both sides. Q:           What happens now? A:            I think that is probably best summed up by saying 'Watch this space'! There is an awful lot to do, but we will strive to keep our customers, staff and partners well-informed each step of the way. And after so much uncertainty, this is a very positive challenge!    http://misys.com/misysblog/2012/q2/launching-a-new-misys.aspx http://misys.com/misysblog/2012/q2/launching-a-new-misys.aspx Fri, 01 June 2012 09:00:00 Risk in the Market http://misys.com/misysblog/2012/q2/jp-morgan-losses.aspx JP Morgan loss could play into regulators' hands The $2bn trading loss on credit derivatives incurred by JP Morgan's chief investment office, which hedges the global group's loan portfolio and invests excess deposits, could toughen the resolve of regulators seeking to put the brakes on perceived high-risk activities.  In a conference call on 10 May ,Chief Executive of the bank, Jamie Dimon, warned the losses could get worse in the next few quarters. "The markets and our decisions will be a critical factor" in putting right the losses, he said, while adding "to put this in perspective, this is the reason we have a fortress balance sheet - to handle surprises". Mr Dimon said the bank's Basel III core capital ratio will be amended down from 8.4% to 8.2% of risk-weighted assets, but that the bank would continue to meet its Basel I and Basel III capital ratio targets, which are conservative. Mr Dimon described the losses as "egregious" and "self-inflicted". In a statement , US Senator Carl Levin, who is chairman of the Senate Permanent Sucommittee on Investigations and one of the authors of the Volcker Rule, which is designed to restrict US banks from making certain types of speculative investments, said: "The enormous loss JP Morgan announced today is just the latest evidence that what banks call 'hedges' are often risky bets that so-called 'too big to fail' banks have no business making. Today's announcement is a stark reminder of the need for regulators to establish tough, effective standards to implement the Merkley-Levin language to protect taxpayers from having to cover such high-risk bets." Mr Dimon acknowledged in the conference call that the loss would "play into the hands of ... pundits out there" who have called for tighter regulation of the financial industry. He said: "This trading may not violate the Volcker rule but it violates the Dimon principle." The Volcker rule is often characterised as a ban on proprietary trading by commercial banks, whereby deposits are used to trade on a bank's personal accounts, although a number of exceptions to this ban were included in the Dodd-Frank Act. Gordon Kerr, founder of Cobden Partners, a UK-based firm that undertakes sovereign advisory work, told Bloomberg that tighter restrictions on proprietary trading are likely to result from the JP Morgan loss, but 'micro rules' would not solve the problem. He argued that managers and directors should be made personally responsible for losses. "The degree of complexity and the innovation skills of bankers will always beat the regulators," he said. Credit default swaps and credit derivatives that are linked to loan portfolios were the primary driver of systemic banking failure and a loss such as JP Morgan's could easily happen again, he warned. David Marshall, a senior analyst at research firm CreditSights in Singapore, was more upbeat, saying JP Morgan is a very large bank that could easily absorb such a loss .  "All banks are vulnerable to fraud and rogue traders, but this loss appears to have resulted from the size and complexity of the risks JP Morgan was trying to manage. It will lend support to critics of the big banks that rely on their own models to predict market volatility. There will be more scrutiny from regulators." The announcement of the loss came on the same day as the release of the latest Harris Poll, which surveys Americans about Wall Street. An overwhelming majority of 82% of the 1016 adults surveyed said recent events (the poll was conducted before the JP Morgan loss) showed that Wall Street should be subject to tougher regulation. However, 62% said Wall Street was absolutely essential to the US economy .  In other findings, 78% of people believed  Wall Street firms should pay bonuses only when they are doing well and making good profits and 70% believed most people on Wall Street would be willing to break the law if they believed they could make a lot of money and get away with it. Mr Dimon said he and a senior management team at JP Morgan would work on the investment office problem: "we will learn from it, fix it and move on", he said.   http://misys.com/misysblog/2012/q2/jp-morgan-losses.aspx http://misys.com/misysblog/2012/q2/jp-morgan-losses.aspx Wed, 16 May 2012 00:00:00 Risk in the Market http://misys.com/misysblog/2012/q2/repo-risk.aspx Report shines a light on shadow banking Efforts to strengthen the regulatory oversight of "shadow" banking systems have taken a step forward with the publication of The Financial Stability Board's (FSB's) interim report,  Securities Lending and Repos: Market Overview and Financial Stability Issues .  The Switzerland-based board, which internationally coordinates work by national financial authorities and standards bodies to develop effective financial sector regulations and supervision, has identified seven issues within the securities financing markets that pose potential risks to financial stability. The issues, which will be further investigated by the FSB, are: Lack of transparency - securities financing markets are complex, rapidly evolving and can be opaque for some market participants and policymakers; Procyclicality of system leverage and interconnectedness - securities financing markets can influence the leverage, complexity and level of risk-taking within the financial system in a procyclical and potentially destabilising way; Other potential financial stability issues associated with collateral re-use - collateral re-use can reinforce procyclicality, and may have other potentially destabilising effects on the financial system; Potential risks arising from fire-sale of collateral assets - non-defaulting counterparties can be expected to sell collateral securities immediately following a default in order to realise cash or buy back lent securities, triggering collateral "fire sales"; Potential risks arising from agent lender practices - agent lenders' practices in handling customer assets and in offering indemnities to their customers against the risk of borrower default need further investigation; Securities lending cash collateral reinvestment - by reinvesting cash collateral received from securities lending transactions, securities lenders (including non-banks) can effectively perform "bank-like" activities that involve maturity/liquidity transformation and leverage; and Insufficient rigour in collateral valuation and management practices - inappropriate collateral valuation and management practices may create vulnerabilities, as seen during the early stage of the financial crisis. The FBS stressed that the seven issues were not equally relevant to all market segments; for example, securities financing for high-quality government bonds tends to be more transparent and contributes less to procyclicality of system leverage. On the day the report was published, Paul Tucker, deputy governor for financial stability at the Bank of England, told a Brussels outlined ten policy recommendations that could "help nudge" the work on addressing risks in the shadow banking industry "to the next stage" .  His recommendations included consolidating shadow banking vehicles Page Content or funds that are sponsored or operated by banks on to bank balance sheets; setting higher draw-down rates in the Basel III liquidity coverage ratio for committed lines to financial companies than for lines to non-financial companies; and that only banks should be able to use client moneys and unencumbered assets to finance their own business to a material extent; and that should be a clear principal relationship. Mr Tucker said a policy framework on shadow banking should be adaptive in order to permit innovation as the financial system evolved. Non-bank finance, he added. Was not "intrinsically a bad thing", but he urged that effective surveillance was made and notice taken of where concentrations of risk were emerging. The International Capital Market Association (ICMA), the international trade association for the capital markets, has been lobbying policy makers about the repo markets and their role in traditional banking as well as the shadow banking industry. In March it issued a study on the repo market conducted by Richard Comotto of the ICMA Centre at the University of Reading in the UK . Mr Comotto emphasised that regulators had to be careful not to undermine the efficiency of the repo market, because that would risk restricting the flow of funding ultimately into the real economy. On the issue of whether repo instruments encouraged excessive leverage, he argued that in practice, markets will not allow banks to keep borrowing, even against good collateral. "The role of collateral is often misunderstood. Lenders are not indifferent to counterparty risk because of collateral. The repo market tends not to lend to riskier counterparties, even if they can offer the best collateral," his report found. There was a case for improving the transparency of the repo market, he said, although a great deal of data already exist and much is underexploited. The financial stability issues identified by the FSB will form the basis of work to develop policy measures to address the risks, which the Board aims to complete by the end of 2012. Comments on the findings can be submitted to the Board by 25 May to fsb@bis.org http://misys.com/misysblog/2012/q2/repo-risk.aspx http://misys.com/misysblog/2012/q2/repo-risk.aspx Wed, 09 May 2012 16:34:00 Risk in the Market http://misys.com/misysblog/2012/q2/mixed-reactions-to-risk-regulations.aspx Two significant regulatory moves to tackle risk were made on both sides of the Atlantic during the last week of March, which generated very different responses from the industry. In the US, the futures market regulator, the Commodities Futures Trading Commission (CFTC) approved rules that will introduce real-time clearing of swaps trades. In Europe, the European Parliament voted to approve the European Market Infrastructure Regulation (EMIR). CFTC's New Regulation The CFTC's rule requires swaps trades to be submitted for clearing only minutes from when the trades are executed, rather than hours or days. The rules are in response to the Dodd-Frank Act, among the aims of which is to move as much of the $700 trillion swaps market as possible into central clearinghouses. It is believed this will reduce the uncertainty of counterparty risk that led to a shutdown of lending and derivatives markets in 2008. The CFTC says: "The proposed rules are designed to make swap transaction and pricing data available to the public in real-time, promote transparency and enhance price discovery while protecting the anonymity of market participants." ( Read full article ) The CFTC regulations require members of clearinghouses to establish risk-based limits on accounts. The rule will require clearing members to monitor the limits during the trading day and overnight. Each week, clearinghouse members also will be required to stress-test positions that present material risk to brokers. The brokers will be required to test in-house proprietary trades as well as client positions that could expose the firms to risks. Those opposing the rules believe banks will not have time to perform adequate credit checks in an open marketplace in the short period of time mandated. They are also concerned that liquidity will be affected and the revenues they generate from swaps trading will be significantly reduced. Gary Gensler, CFTC chairman said: "It is a small group of dealers and the International Swaps and Derivatives Association [ISDA] that raise concerns because they're rational. They're protecting their revenue potential," he was reported as saying at a public meeting after the vote. In a statement he said: "Uniform standards lower risk because they allow market participants to get the prompt benefit of clearing rather than having to first enter into a bilateral transaction that would subsequently be moved into a clearinghouse." European Regulation In Europe, regulatory efforts have been more welcome, although some concerns about details remain. Michel Barnier, Commissioner for   Internal Market and Services, said the vote to approve EMIR was "a key step in our effort to establish a safer and sounder regulatory framework for European financial markets". ( Read full article ) US central securities depository, the Depository Trust and Clearing Corp said: "DTCC welcomes [the] agreement on EMIR. This is a major milestone in Europe's efforts to bring greater stability and risk mitigation to financial markets. We look forward to continuing to work collaboratively with policymakers and regulators … A major issue in the months ahead will be addressing unresolved issues such as extraterritoriality and harmonisation of new regulations with and between the United States and Asia." ( Read full article ) In a joint statement, ISDA, AFME and BBA said: "We support the direction of regulatory change for both cleared and non‐cleared OTC derivatives, as evidenced by the progress made in the upgrade of industry infrastructure in recent years." The organisations however pointed out a number of issues that needed to be addressed including bilateral risk mitigation and front loading. ( Read full article ) The new rules objectives' are to increase transparency in the OTC derivatives market and to make it safer by reducing counterparty credit risk and operational risk. To increase transparency, the new rules require that detailed information on OTC derivative contracts entered into by EU financial and non-financial firms are reported to trade repositories and made accessible to supervisory authorities, and that trade repositories publish aggregate positions by class of derivatives accessible to all market participants. To reduce counterparty credit risk, the rules introduce stringent rules on prudential, organisational and conduct of business standards for CCPs; mandatory CCP-clearing for contracts that have been standardised; and risk mitigation standards for contracts not cleared by a CCP To reduce operational risk, EMIR requires the use of electronic means for the timely confirmation of the terms of OTC derivatives contracts. This allows counterparties to net the confirmed transaction against other transactions and ensure accurate book keeping. Before the EMIR rules are implemented, the European Supervisory Authorities must develop technical standards and submit them to the European Commission by 30 September. These new standards should be fully adopted by the Commission by the end of 2012. Central counterparties will have to apply for authorisation under the new European regime at the latest six months after the adoption of the technical standards by the Commission. In the meantime, CCPs must continue to comply with national rules on authorisation. Please click here to return to the  Risk in the Market  homepage This article was written by Heather McKenzie http://misys.com/misysblog/2012/q2/mixed-reactions-to-risk-regulations.aspx http://misys.com/misysblog/2012/q2/mixed-reactions-to-risk-regulations.aspx Mon, 09 April 2012 00:00:00 http://misys.com/misysblog/2012/q2/otc-derivative-regulations-putting-the-theory-into-practice.aspx OTC derivatives are, and will always be, an important part of global financial markets. But before the 2008 financial crisis, they grew rapidly without appropriate regulatory control, leading to problems of inadequate counterparty risk management and a lack of transparency. Recognising this, in 2009 the G-20 concluded that four changes were needed: In this post, we'll look at the steps that are being taken by the US and Europe to address the weaknesses within the OTC derivatives market . Implementation process Following on from the G-20, countries around the world are beginning to implement the new regulations. However, progress is slow and at various stages in different countries. In this post, we will look at how the US and Europe are putting wheels in motion. In the case of the US, they have passed a complex reform law, the Dodd-Frank Act, and the two major regulators (Securities and Exchanges Commission - SEC, and Commodities and Futures Trading Commission - CFTC) are creating practical rules that will be implemented by all banks and financial institutions. Europe is at a similar stage with the European Market Infrastructure Regulation (EMIR) and MiFID II working together to set out the EU's regulatory approach. So, what are the different components of OTC clearing and how does the European and US approach compare? Components of OTC clearing Timeframe The timeframe for compliance is tight. Firms that are affected need to prepare for the new regime as in Europe compliance must be in place by January 1 st 2013, whereas in the US it is intended to be in force by the end of September 2012. Scope In the case of the US and Europe, the clearing obligation will apply across all five derivative asset classes: Interest rate Equity Credit Commodity Foreign exchange Exemptions In relation to product exemptions, Europe doesn't provide any. However, the US expressly provides exemptions on equity and foreign exchange derivatives, such as FX swaps and FX forwards. Trading venue Currently, in the US, there is little guidance about how the security-based swap execution facility requirement is going to work. In Europe, the EMIR and MiFID II aren't aligned leaving trading venues being classed merely as regulated markets (e.g. London Stock Exchange), multilateral trading facilities (e.g. BATS/Chi-X) and organised trading facilities, which are a new kind of trading venue introduced by MiFID II. Margin requirements How margin requirements are to be calculated still remains unclear. When it comes to cleared OTC derivatives, they both show that the CCP will deal with the initial margin and daily variation margins. However, for un-cleared OTC derivatives, Europe stipulates daily margin calculation and segregated exchange of collateral at mark-to-market (or mark-to-model), whereas the US stipulates calculation of initial and variation margin, although there is no regulatory proposal to hold collateral from the swap dealer. Reporting to trade repositories One of the main concerns with the OTC derivatives market is that regulators don't have a full picture of the exposure of the firms they regulate, hence the requirement of trade repositories . Essentially, these form a central database where information on positions is collected. Both US and European proposals require reporting of full trade data within one day of execution. The hole in the regulation net As mentioned earlier, although this post has concentrated on the US and Europe, these regulations are being adopted globally. The main issue at present however, is the speed at which these guidelines are being implemented. For example, Asian regulators have been much slower implementing OTC clearing leaving a loophole ready for exploitation. Why? Simply because their delay in implementing the regulations leaves the door open, making it technically possible for financial institutions to avoid the stricter regulation in Europe and the US by moving some of their business to Asia, despite this going against G-20 guidelines. The final post in this series looks at what it will take for banks to show compliance with OTC clearing.  http://misys.com/misysblog/2012/q2/otc-derivative-regulations-putting-the-theory-into-practice.aspx http://misys.com/misysblog/2012/q2/otc-derivative-regulations-putting-the-theory-into-practice.aspx Wed, 03 October 2012 00:00:00 Emmanuelle Faddoul http://misys.com/misysblog/2012/q2/have-your-say-in-this-year's-risk-technology-survey.aspx Risk Magazine's Annual Technology Survey asks financial professionals to nominate the companies that provide the best offerings across a number of different categories including pricing and analytics, trading systems, risk management and regulatory reporting. To reflect evolving technology concerns, this year have been added categories for central counterparty clearing , algorithmic trading and high-performance computing. If you believe that Misys have the best offering in one or more categories, have your say and click here to vote ! The closing date for the poll is October 26. Thank you for your support. http://misys.com/misysblog/2012/q2/have-your-say-in-this-year's-risk-technology-survey.aspx http://misys.com/misysblog/2012/q2/have-your-say-in-this-year's-risk-technology-survey.aspx Mon, 08 October 2012 15:59:00 Alex Bray http://misys.com/misysblog/2012/q2/gamification-the-serious-business-of-fun.aspx The serious business of fun - what gamification and social media mean for banking Part I Fun is big business. Annually, the computer games industry makes $115bn. The phenomenal success of this industry, which is now bigger than Hollywood, is attributable to the fact that it appeals to fundamental elements of human nature: competition, reward, problem solving and social connection. Gamification is the term for an approach to marketing and sales that employs the attributes of gaming to engage customers, change behaviours and expectations. Financial services companies are experimenting with these concepts to get ahead of the curve and differentiate themselves in the market. Misys believes this trend will grow. In a world where customer relationships are increasingly digital, banks cannot afford to be left behind. The basics of gamification have been around for some time. Foursquare has been awarding badges and ranking users for location check-ins since 2009.  The principles of gamification have also been adopted by companies like IBM and Salesforce. Gartner has highlighted gamification as a key trend for CIOs - and it has been covered recently in American Banker magazine. Social media has also changed the way people connect, discover, recommend and share. With the internet providing a huge amount of choice, index search is being replaced by recommendations from friends, family and people we trust, through social media. It's a self-moderating quality control system that threatens traditional marketing and distribution models whilst simultaneously providing viral means to spread the word, good or bad. Gamification and social media are changing the way people engage and expect to engage with their friends and increasingly their employers and service providers. Banks now have new ways to be relevant, engage customers and improve sales. What is Gamification? Gamification is the use of games or competition to encourage a user to complete an action or set of actions. Users respond to a range of prompts and are encouraged to return regularly to the application. The prompts include: Competition - adding league tables motivates participants to try and come top. Users either compete with friends (if there is integration with social media) or other users like them. This is a core feature of Foursquare. Awards - giving badges and rewards provides a sense of achievement and progress and encourages users to continue to use the application. Contd..., Want to learn more? Download our Gamification whitepaper here and watch our proof of concept video here . http://misys.com/misysblog/2012/q2/gamification-the-serious-business-of-fun.aspx http://misys.com/misysblog/2012/q2/gamification-the-serious-business-of-fun.aspx Tue, 09 October 2012 16:23:00 http://misys.com/misysblog/2012/q2/bpo,-sibos-and-swift.aspx Despite industry inertia to change, bank payment obligation is an opportunity for a positive evolution in the face of an increasingly online industry. Trade finance has always been a relatively well covered topic at Sibos, the annual event for the SWIFT community. Awareness of this event, however, has increased over the years and Sibos 2012 in Osaka is expected to show the community's vibrant interest in trade and supply chain finance. The main focus of discussions sponsored by SWIFT in this space is, again, likely to be around the bank payment obligation (BPO) and the progress made over the past 12 months in standardising this new financial instrument. And it has gone well thus far. A draft of the proposed Uniformed Rules for BPO (URBPO) was published by the International Chamber of Commerce (ICC) in May 2012 and the rule is still on track to be officially published for the second quarter of 2013. In preparation for these discussions at Sibos, it's time to review BPO from a technology perspective. Launched at the beginning of 2010 by SWIFT, BPO provides an alternative means of settlement in international trade. While letters of credit (L/Cs) have been around for years and are trusted and used globally, the time and paperwork required means that there is certainly space for modernisation of the system, particularly when it comes to open account transactions not currently benefiting from L/Cs' well-known risk mitigation advantages. A BPO is an irrevocable undertaking given by a bank to another bank that payment will be made on a specified date after a successful electronic matching of data according to a defined set of rules. Therefore, a BPO offers an assurance of payment, risk mitigation for all parties and possible use as collateral for finance. It enables banks to provide their trade finance customers with guarantees and other banking services on open account terms. Based on ISO 20022 messaging, it brings together the Trade Services Utility (TSU), SWIFT's matching utility as a reference implementation, with a set of business rules that replace the reliance of L/Cs on actual documents (either on paper forms or electronic as authorised for many years by the eUCP rules of the ICC but with little success) with dynamic data sets that can be automatically streamed. As is often the case, change involving new technologies and standards can be daunting, but in the case of BPO, there are a number of reasons not to be afraid. Its standards-based technology foundations in particular are merely following the same path of evolution undertaken by other areas such as cash management since the mid-2000s, and the transition to BPO is unlikely to be problematic on this front. Beyond the clear benefits of the instrument itself from a financial and risk management perspective, complementary advantages are also expected in the increased granularity of the data the BPO exposes. Not only will it improve settlement of trade transactions, but its ability to read even more information and increase visibility should also mean banks are able to enhance their services too. Contd..., To read the full article, please download our whitepaper here . http://misys.com/misysblog/2012/q2/bpo,-sibos-and-swift.aspx http://misys.com/misysblog/2012/q2/bpo,-sibos-and-swift.aspx Wed, 10 October 2012 10:59:00 Misys http://misys.com/misysblog/2012/q2/nearly-50-of-banks-still-lack-a-well-formulated-risk-management-strategy.aspx Business decisions are based on historical or inconsistent information, with no clear view of all risks across their organization. Too much time spent on tactical regulatory reporting rather than trying to embed a modular long-term architecture that allows them to manage these risks in a flexible, collaborative way. To read the full report, and learn how to overcome these challenges, please download it from the Hub in http://mgr.misys.com http://misys.com/misysblog/2012/q2/nearly-50-of-banks-still-lack-a-well-formulated-risk-management-strategy.aspx http://misys.com/misysblog/2012/q2/nearly-50-of-banks-still-lack-a-well-formulated-risk-management-strategy.aspx Thu, 01 November 2012 09:19:00 Jay Mukhey http://misys.com/misysblog/2012/q2/buy-side-blog-have-you-considered-the-alternatives.aspx This blog series intends to analyze the current opportunities and challenges associated with the three major forces that have impacted the asset management industry since its inception: market conditions, external regulation and investor behavior. The financial crisis of 2008 triggered several significant downturns in the market, an unprecedented amount of regulation in an effort to avoid a repetition of the events that occurred, and nervousness amongst investors. However, it is not all doom and gloom. By adapting to change, asset managers are able to overcome today's challenges, discover the opportunities, and in doing so, find the path to higher returns.   Asset managers in the conventional space are facing a perfect storm. On the one hand is an unprecedented tough return environment as fixed income yields and equity returns remain depressed. On the other, more sophisticated investors are becoming their own active managers by assembling low-cost ETFs from a rapidly expanding universe. At the same time, the advent of regulations such as Solvency II for insurers, and the shift in focus from assets to liabilities among pension plans, is transforming the solutions clients require from their asset managers. With the superior returns promised by alternatives products, the question for managers is not whether to diversify into this space but how.   At the heart of the 'how' question is finding a solution that delivers effective operational support at the same time as meeting soaring transparency requirements from investors and regulators. Moreover, the alternatives space typically involves illiquid assets and complex hard-to-value derivatives where the collection and presentation of real-time position risk information requires combining prices across several different portfolios. So it is definitely not straightforward but as markets are constantly changing, the need for market participants to adapt is now stronger than ever. Follow this blog series to discover how and why leading asset management firms are implementing an alternatives strategy to overcome current challenges and take advantage of the opportunities available in the market today. Click here to download the associated white paper - Searching for alpha: considering alternatives to generate growth   Check back next Monday for the next installment of our weekly Buy-side Blog. http://misys.com/misysblog/2012/q2/buy-side-blog-have-you-considered-the-alternatives.aspx http://misys.com/misysblog/2012/q2/buy-side-blog-have-you-considered-the-alternatives.aspx Mon, 19 November 2012 11:36:00 Jay Mukhey http://misys.com/misysblog/2012/q2/buy-side-blog-asset-management-a-landscape-transformed.aspx Charles Darwin claimed that 'only the fittest survive' and his theory of evolution has never been more relevant to the asset management industry as it is today. The three forces mentioned in my first blog entry are applicable to several key challenges for asset managers operating in the current financial climate. Firstly, it is harder for them to seek out returns from conventional asset classes. Secondly, regulatory changes like Solvency II mean that institutional investors are demanding more bespoke solutions and increased transparency. Finally, high net worth clients have become smarter, more sophisticated and less forgiving of poor returns.  1. Historical low returns in conventional asset classes Perhaps the biggest challenge for asset managers is making returns from conventional asset classes. The on-going crisis in the global economy has led to poor yields from investments in global sovereign debt and equities, which typically make up the lion's share of portfolios of traditional institutional asset owners, such as pension funds and insurance companies. Return from equity markets, is at historical lows as managers face the prospects of a long-term bear market. Analysis by Martin Pring, Chairman of US investment advisor Print and Turner Capital Group, suggests there is still a long way to go before recovery. His predictions are based on the three major equity bear markets of the last century, which lasted between 18 and 20 years. The analysis spans at least four recessions and highlight a decline in equity valuation in excess of 60%, adjusting for inflation. 2. More sophisticated investors Just as managers are finding it harder to give investors what they want, investors are becoming more demanding and more likely to change manager.  Most investors suffered severe drawdowns during the financial crisis. This experience made them seek greater understanding of the types of instruments and strategies on offer to them. Increasingly, they are assembling strategies in-house, rather than going to an external management, making use of the increasing range of low-cost routes available via exchange-traded funds (ETFs) and passive investments. When investors do use external providers they have become more demanding - specifically, their investment horizon has contracted. Institutional managers report that investors view three - rather than five - years as a long-term time horizon to consider the success of an allocation. This demonstrates that investors are far less patient with poor performance especially when it comes with low transparency and high fees. Ultimately, if a manager is underperforming, investors will move to a competitor. 3. A new framework for solvency management So the investment environment has become more challenging for managers and investors have become more discerning. Regulation is also drastically changing the landscape in which asset managers will operate. Specifically, Solvency II is transforming the type of products and services that asset managers must offer to insurers. Solvency II, the review of the capital adequacy regime for the European insurance industry, represents one of the most wide-ranging regulatory reform the sector has ever seen. Currently, insurers hold capital based on their premiums. In future, the risks that insurers face within investing activities must be factored in when regulators decide how much capital these institutions must hold. The Pillar 1 framework includes the so-called Solvency Capital Requirement (SCR). The SCR should facilitate insurance and reinsurance undertakings to absorb significant losses and give reasonable assurances to policyholders and beneficiaries that payments will be made as they are due. For further insight download the white paper - Searching for alpha: considering alternatives to generate growth http://misys.com/misysblog/2012/q2/buy-side-blog-asset-management-a-landscape-transformed.aspx http://misys.com/misysblog/2012/q2/buy-side-blog-asset-management-a-landscape-transformed.aspx Thu, 06 December 2012 12:39:00 Barry Kislingbury http://misys.com/misysblog/2012/q2/global-trends-in-payments.aspx These days, payment processing is a wide and dynamic topic. A far cry from the industry of 10 years ago, yet how many banks have updated their payments infrastructures to cope with the increasing speed of change that is happening in the world?  There is a saying that everything a bank does results in a payment.  It is the nature of banks, to lend, to invest, to send and receive funds.  All these activities involve the movement of money and a payment.  There's nothing new about that.  But what is new is the speed and diversity of change in society and business and its effects on what banks do.  From a consumer perspective, virtually everything we do requires us to pay for a service, goods, or food.  This all results in a payment, and we want to do it in the easiest and cheapest way, which is increasingly via electronic channels. This is the same for businesses, but unlike individuals, who have a few payment options available to them; businesses have multiple channels and banking relationships.  However, all businesses really want to know is where their money is and how much they need to keep the wheels running smoothly.  Not an easy task, even if electronic channels are used. Then there are the government's plans to make their domains more efficient for businesses, safer and fairer for the public and more difficult for criminals.  The results of this unprecedented level of change are many and varied. To learn more, please download our free whitepaper: Global Trends in Payments http://misys.com/misysblog/2012/q2/global-trends-in-payments.aspx http://misys.com/misysblog/2012/q2/global-trends-in-payments.aspx Mon, 03 December 2012 15:19:00 Alex Bray http://misys.com/misysblog/2012/q3/augmented-reality-in-fs-–-got-your-goggles.aspx 'Mobile banking' is not a very precise term. Today, we know it as meaning using your mobile phone for banking. However, back in the late 1990s, all that it meant was SMS banking. If your bank was particularly advanced, it may also have meant a WAP-based mobile banking service. It has only been since the launch of smartphones in the mid-2000s, that 'mobile banking' has come to mean a browser- or mobile app-based banking service. But I predict that the term 'mobile banking' is about to undergo a major transformation, with some serious implications for retail banking. In the next 3-5 years, the meaning of mobile banking will become more literal - an umbrella term to refer toanybanking on the go. I believe the catalyst for these changes will bewearable devices. The much heralded Google Glass (or one of the slew of alternatives from Vuzix or even China's Baidu) have the potential to radically reshape customer behaviours - just as the iPhone has done since 2007. With these new devices, customers will be able to see information in a whole new way. Printed advertisements or product illustrations will be animated or overlaid with supplementary information - yes, think Minority Report - providing customers with a clearer explanation of their options and helping them to identify any financial needs. Personal information displayed through the glasses cannot be overseen, offering users a higher level of security. Customers will be able to voice activate their devices whilst on the move. Directions to ATMs and branches can be overlaid onto a customer's view of the world around them, making services easier to locate. These are just a few of the possibilities augmented reality glasses will open up to banks.  Other wearable devices, like the 'iWatch' bracelet design recently patented by Apple , hint at a yet another inventive approach to mobile banking. To make the most of these opportunities and land grab through innovation, banks need to start thinking now about how to design customer experiences for the arrival of these technologies. Even at this early stage, it is possible to identify a potent customer value proposition based around enhanced convenience and security. At the same time, banks need to start thinking creatively about the ways in which these technologies can help customers to identify needs and ultimately select and buy products. Banks like Halifax in the UK and Commonwealth Bank in Australia have already demonstrated the potential to drive sales from augmented reality functionality with their home finder mortgage apps . Clearly there is much more that could be done. There will be many who think this is all pie in the sky. I fervently disagree. iPhones went from revolutionary to commonplace in a matter of a few short years. I strongly expect the new wearable devices to complete this process even faster. Banks need to prepare now - or run the risk of being left behind. What do you think? Will you be sporting Google Glass when it hits the high street? If you say no, I'll hold you to it when I catch you. http://misys.com/misysblog/2012/q3/augmented-reality-in-fs-–-got-your-goggles.aspx http://misys.com/misysblog/2012/q3/augmented-reality-in-fs-–-got-your-goggles.aspx Thu, 02 May 2013 09:15:00 http://misys.com/misysblog/2012/q3/trade-and-supply-chain-finance-leveraging-cash-to-compete.aspx The global financial crisis that erupted in late 2007 has generated consequences that are still developing, and in many respects, not yet fully measured or understood.   Small and medium-sized enterprises have long claimed that access to capital (more precisely, limited access to capital) is one of the major obstacles to growth and success; likewise, developing and emerging economies are consistently reported to suffer the most drastic constriction of credit in times of crisis. International trade, by its nature, involves longer timeframes in almost every aspect of commercial activity, from feasibility analysis to business development and sales, to negotiation and contracting, to the completion of a transaction, and settlement of monies due. This extended timeframe has direct implications for the working capital and liquidity position of companies pursuing business across borders: working capital is adversely impacted, and becomes a matter of higher priority for companies that understand the importance of cash. Pre-crisis, the global financial system was often described as being awash in liquidity - so much so, that borrowing was both easy and inexpensive; buyers routinely expected, and received, favourable credit terms from even the smallest suppliers, and larger companies were well-positioned to borrow from their bankers, or to access financial resources directly through the capital markets. Read the more in our free whitepaper here . http://misys.com/misysblog/2012/q3/trade-and-supply-chain-finance-leveraging-cash-to-compete.aspx http://misys.com/misysblog/2012/q3/trade-and-supply-chain-finance-leveraging-cash-to-compete.aspx Mon, 18 March 2013 10:17:00 Jessica Buhl http://misys.com/misysblog/2012/q3/consolidated-commercial-lending.aspx Consolidated Commercial Lending The Real Business Case for Unified Commercial Lending Platforms Specialist systems are not the answer to the problem of cost-ineffective lending operations, they are the cause. A unified lending solution can do more than just cut costs - it can move the return on equity needle. The extensive system fragmentation within the typical institution's commercial lending business is a consequence of the accumulation of multiple solution offerings over time. While this has often occurred as the result of never-integrated mergers or acquisitions, just as often systems accumulate due to the disparate nature of commercial lending business lines. Having created this Gordian knot of systems and processes, the dream of a global platform based on a single data model with common, scalable operational processes is seemingly lost forever.  Or is it? In a climate of limited growth and compressed margins, the overall cost of end-to-end support across the commercial lending business remains one of the few profit levers within grasp. Institutions which re-examine their systems, processes, and procedures with a view to simplifying the system landscape and implementing common platforms and processes can enjoy staggering cost savings, but actually achieving this remains a significant challenge. In our first white paper in a series on the lending area we examine the high cost of system and process redundancy within commercial lending operations, how operations came to be so inefficient, and why there is cause for hope. To read the full white paper, click here . http://misys.com/misysblog/2012/q3/consolidated-commercial-lending.aspx http://misys.com/misysblog/2012/q3/consolidated-commercial-lending.aspx Fri, 01 March 2013 12:24:00 Michel Dorval http://misys.com/misysblog/2012/q3/how-to-achieve-basel-iii-compliance.aspx The new Basel III rules will have a significant impact on the banking world - not just on the business environment, but also for the technology required to underpin compliance. Basel III implications for the business have been grouped under three main headings: • Trading book risk • The introduction of a global liquidity risk standard, and • The requirements of the capital base Trading book risk basically covers enhanced counterparty credit risk requirements, such as stressed parameters for market and counterparty credit risk, credit valuation adjustment (CVA) and wrong way risk. The global liquidity risk standard focuses on new liquidity ratios and additional monitoring metrics, such as the concentration of funding; and the aim of the new capital base requirements is to increase the quality, quantity and international standardization of the capital base. Each of these areas raise different challenges from a business perspective. In terms of the technology needed to insure compliance, however, while there are differences between the three, there are also similarities in terms of the data management, calculations, advanced analytics and reporting requirements. To read the full whitepaper, click here http://misys.com/misysblog/2012/q3/how-to-achieve-basel-iii-compliance.aspx http://misys.com/misysblog/2012/q3/how-to-achieve-basel-iii-compliance.aspx Fri, 15 February 2013 00:00:00 Barry Kislingbury http://misys.com/misysblog/2012/q3/are-you-ready-for-the-sepa-deadline.aspx Last March the European legislator adopted Regulation No 260/2012, commonly referred to as the "SEPA migration end-date regulation".  It lays down rules for the initiation and processing of credit transfers and direct debits denominated in euro within the European Union. SEPA will impact all current and future providers and users of payment services within the EU and beyond; as well as market infrastructures, card schemes, software vendors and other payment service providers. The regulation defines a clear timeline specifying when these rules need to be implemented in all Member States. For the euro area, the final deadline is 1 February 2014. The deadline for euro-denominated payments in non-euro area countries will be 31 October 2016. As of these dates, existing national euro credit transfer and direct debit schemes will have to be phased out and replaced by SEPA alternatives. Is your bank ready for SEPA? Download our free whitepaper here  or register for our SEPA webcast on 28th February by clicking on the infographic below. http://misys.com/misysblog/2012/q3/are-you-ready-for-the-sepa-deadline.aspx http://misys.com/misysblog/2012/q3/are-you-ready-for-the-sepa-deadline.aspx Thu, 07 February 2013 15:47:00 Steve Walshe, Brian Edmondson http://misys.com/misysblog/2012/q3/global-processing-and-trade-services.aspx Banking globalisation continues apace. While national players fight for domestic market share, regional and global banks are looking for acquisitions to expand international reach and capabilities. Regulators are struggling to keep pace with the rate of change, with multiple authorities attempting to impose their specific governance, capital and risk management requirements. In the race to reach into new markets, there are huge advantages to be gained by buying local expertise, culture and knowledge. Existing customers gain access to global capabilities, new products and services can be sold to a comparatively captive audience, and the potential economies of scale can make acquisition a tempting strategy. Unfortunately, the very nature of these local operations prevents the realisation of truly global operations. Different ways of working, isolated core banking and reporting solutions, and natural human resistance to the arrival of the corporate 'Big Brother' all combine to resist the drive to rationalise, streamline and unify worldwide processes.  The result is that striking a balance between local needs and operational efficiency is proving to be a great deal more difficult than previously imagined. Recent events have ratcheted up the competitive pressure, as the more esoteric financial products have declined and banks seek to return to core customer services, such as trade finance, treasury, foreign exchange and international remittance. In particular, trade finance offers a specific area that is very close to customers' business activities, and may open up the doors to additional services. Customers know that the more traditional services are once again attractive, profitable activities for banks. The result is that margins here, too, are squeezed, placing even more emphasis on the cost-efficiency of global processing and back-office capabilities. Read more in our free whitepaper: 'Global Processing and Trade Services: the case for standardised international processing' . The whitepaper looks at why banks urgently need to introduce standardised worldwide processes, the challenges faced, and the potential benefits. The accepted shorthand is 'global processing;' the ability to complete financial transactions regardless of location. http://misys.com/misysblog/2012/q3/global-processing-and-trade-services.aspx http://misys.com/misysblog/2012/q3/global-processing-and-trade-services.aspx Mon, 14 January 2013 12:01:00 Risk in the Market http://misys.com/misysblog/2011/q4-2011/meet-the-team-harbinder-kang,-lead-qa-engineer-for-topoffice-development.aspx In this instalment of our ' Meet the Team ' series we talk to Harbinder Kang about his role, his motivations and find out what he does to get away from it all.  WHAT IS YOUR ROLE IN RISK? I'm the Lead QA Engineer in the TopOffice development group. This means I am responsible for making sure that we provide a stable and well performing product to our clients on release date. I like to feel we take a progressive approach towards achieving that aim by employing a software engineering practise known as continuous integration (CI). CI boils down to implementing quality control with small pieces of effort, applied frequently during development, replacing the traditional model of post-development quality control. The aim is to improve the quality of software, and to reduce the time taken to deliver it. One of the challenges of using CI is to ensure the entire team employ a CI mindset; I have enjoyed helping to bring about that change within my team. WHAT ATTRACTED YOU TO THIS ROLE? I spent my placement year at Thomson Reuters and the experience helped me grow as with opportunities to work with a diverse set of individuals. After I graduated I was given the opportunity to join a small team that had just been acquired by Thomson Reuters, working on a front office risk platform that was then called JRisk. The challenge of working with a small galvanised team with the mentality of start-up appealed to me. WHAT DO YOU LIKE ABOUT WORKING IN RISK? I am fortunate to have had the opportunity to progress my career within the RISK team. Because the team is small and yet dynamic, I have had the opportunity to get involved in all aspects of software development from support through to project management. The added benefit is the social dynamic of our team; a competitive yet friendly game of football or badminton is always a nice way to finish the day. WHAT DO YOU LIKE ABOUT YOUR ROLE IN RISK? The great thing about my role is that I get a rounded view of the product and how well it works for our clients. I have a somewhat unique vantage point that allows me to see the successes, as well as the areas where we face challenges. I enjoy the problem-solving and client interaction elements of what I do that allow me to take a lead in how we shape the product and the way our team works on a day to day basis. Working with incredibly skilled and capable individuals is an added bonus, not to mention a great motivator! HOW DO YOU GET AWAY FROM IT ALL? I love getting active, martial arts having been a particular passion of mine from a young age. I find the physical and mental disciplines involved a good way to escape from day-to-day rigours and I value the social circle that I am now privileged to be a part of. Please click here to return to the  Risk in the Market  homepage http://misys.com/misysblog/2011/q4-2011/meet-the-team-harbinder-kang,-lead-qa-engineer-for-topoffice-development.aspx http://misys.com/misysblog/2011/q4-2011/meet-the-team-harbinder-kang,-lead-qa-engineer-for-topoffice-development.aspx Fri, 30 September 2011 12:45:00 Risk in the Market http://misys.com/misysblog/2011/q4-2011/welcome-back-to-risk-in-the-market.aspx WELCOME BACK TO THE LATEST EDITION OF RISK IN THE MARKET, RISK MANAGEMENT'S ONLINE MAGAZINE.  We took a deep breath following the last edition of  Risk in the Market  and   looked at where we were going. After listening to our customers and getting some expert advice on our digital strategy, we decided to change things. Moving forwards,  Risk in the Market  will become a more interactive blog. Here, we will be showcasing our thought leadership and industry expertise by dealing with the market issues and challenges that are keeping you up at night. This will become a platform for our customers to interact with each other and our industry experts, sharing ideas and opinions. So we really want to hear from you and what you're thinking! The new format will involve more frequent entries so you are always up to date on the latest news from RISK Management. We have integrated Bookmark, Share and Follow Us functionality to make it easier for you to read and contribute to the latest and most innovative thinking from us. This coincides with our launch of @riskinthemarket  on Twitter and an renewed drive to increase our presence on LinkedIn through our group Thomson Reuters Risk Management . Lastly we have introduced an interactive Word Cloud to improve the navigation around the site. This is all leading us toward a richer and deeper engagement with our customers and the market in general. We have many more exciting changes planned for  Risk in the Market  in the near future, so please keep checking frequently for the latest updates and news which will be coming soon. As ever, we would like to thank our customers, employees and contributors for their input to  Risk in the Market  and we are confident you will find the contents interesting. This edition sees the introduction of our  innovation series , which will keep you up to date about our visions for our products (including the latest product developments) and trends in the market. This will be of particular interest to our customers with the imminent release of the latest version of Kondor+. We also hear from one of our  talented developers  about his career and why he like working in the RISK team. We have begun the serialisation of a sequence of white papers that challenge the latest thinking on  Potential Future Exposure  (PFE) and  Solvency II . Lastly, we have an insight into  Liquidity Risk  with an interview with Maurizio Natta, Head of Business Solutions for Risk and Trade Management in EMEA. The eagle eyed amongst you will have noticed that Risk is being sold and Vista Equity Partners are the successful bidders. We are very excited about the potential sale and to keep you informed we will be posting information on  Risk in the Market  as soon as it becomes available. Please remember this blog is for you, the reader, and we want your thoughts, comments and opinions. So please don't hesitate to get in touch through the multiple channels our new digital marketing strategy has now opened up. Happy Reading Melanie Hill Please click here to return to the  Risk in the Market  homepage http://misys.com/misysblog/2011/q4-2011/welcome-back-to-risk-in-the-market.aspx http://misys.com/misysblog/2011/q4-2011/welcome-back-to-risk-in-the-market.aspx Mon, 03 October 2011 14:30:00 Risk in the Market http://misys.com/misysblog/2011/q4-2011/solvency-ii-–-meeting-the-challenges-head-on.aspx The fourth post in Risk in the Market's series on Solvency II concentrates on how the insurance industry can meet the challenges of data management to ensure compliance. SOLVENCY II - THE CHALLENGES   By the end of 2013, the Solvency II directive will impose new regulatory requirements on the insurance industry within the EU. As discussed in our post ' Solvency II - The Challenges Ahead ', insurers will face specific challenges such as: Risk in the Market: Solvency II Data management Valuation of assets and liabilities Risk analysis Reporting (disclosures) At the heart of these challenges is the quality of data, its management and integration. For the insurance industry that could pose a problem. Historically, the IT landscape of the insurance industry has been notoriously heterogeneous. It is not unusual to find multiple legacy solution systems running on differing operating systems using different databases. All of this adds to the complexity of compliance. THE CHALLENGE OF DATA MANAGEMENT For the insurance industry, Solvency II compliance relies on data being auditable, relevant, accurate, complete and appropriate. Therefore, it doesn't matter how well structured a company's internal model, if the captured data is incorrect, their risk calculations and capital requirement will be distorted. To counter potential data inaccuracies, companies would be well advised to take precautionary measures, such as:   THE SOLUTION An effectual Solvency II solution will enable insurers to overcome their data management challenges. To illustrate this, below is an example of how Company A overcame its data disparities to achieve compliance with the new directive. DATA MANAGEMENT SCENARIO: As with many insurers, Company A had multiple source systems and a disparate architecture. Data integration had always been a manual process involving complex calculations, often resulting in errors. To ensure compliance with Solvency II, Company A adopted a Solvency II solution to fully automate their data integration process. By using a powerful mapping engine, they can now integrate all the required static data, market data and deals from multiple sources into their Solvency II solution. As a result, Company A can now execute an automated process to produce final market risk that is auditable, traceable and complete. By adopting a business change programme and implementing a complete Solvency II solution, Company A has not only assured compliance with the new directive, it has also improved its data management procedures. This will result in greater efficiency and improved productivity. The next post in our Solvency II series looks at the challenges associated with the valuation of assets and liabilities. This post was taken from a white paper written by Michel Dorval, serialized for Risk In The Market by Sally Ormond. The full white paper will be made available once the final post in the series is published. Remember to check Risk in the Market frequently for the next instalment. Please click here to return to the  Risk in the Market  homepage http://misys.com/misysblog/2011/q4-2011/solvency-ii-–-meeting-the-challenges-head-on.aspx http://misys.com/misysblog/2011/q4-2011/solvency-ii-–-meeting-the-challenges-head-on.aspx Wed, 12 October 2011 00:00:00 Risk in the Market http://misys.com/misysblog/2011/q4-2011/delivering-trade-lifecycle-automation-with-straight-through-processing-(stp-part-one).aspx This is the first of Risk in the Market's two-part interview with Sebastien Jacquet, Thomson Reuters Risk Management's product manager for K+TP where he discusses the problems faced by many banks trying to extend their use of trade lifecycle automation and Straight Through Processing (STP) and the main strategic goals for successful STP across different asset classes and business units. HAS STP LIVED UP TO ITS ORIGINAL HOPES?  Let's start with a definition of what we're talking about - STP is the seamless, electronic, end-to-end processing that encompasses the entire lifecycle of a transaction, from trade execution to settlement and reconciliation. The basic idea of STP has been around since the mid-1990s but thus far, it has never provided the complete answer to the post-trade processing problems experienced by all banks at some point. Depending on the figures you look at, up to 50 per cent of all European trades still require some degree of manual intervention at some point in the transaction lifecycle. For example, interest-rate derivatives are particularly susceptible to low STP rates - the trades typically flow well through trade processing /matching and portfolio accounting, but suffer from poor automation during clearing and settlement and order/trade management. Of course, one solution is to have a separate system for each client activity. However, this additional complexity itself causes failures due the number of disparate systems. WHAT ARE THE COSTS AND BENEFITS OF  TRADE LIFECYCLE AUTOMATION AND STP? The immediate cost benefits of STP are compelling. Let's look at some average figures from across the capital markets - 60 per cent of instructions need to be repaired at a an average cost of $6 per trade, 10 per cent of confirmations are mismatched, costing $16 per trade, and 15 per cent of all trades are unable to be settled in time, resulting in an average cost of $50 per trade. To put these figures in perspective, for an institution making 10,000 trades per day, the annual cost of these various failures in the trade lifecycle is around $4.8 million. Another way of looking at this is that 30 per cent of processing costs and 75 per cent of staff costs can be saved through widespread STP and automation. WHY DOES STP AND EXCEPTION MANAGEMENT SOMETIMES FAIL TO DELIVER? Despite significant industry-wide spending on STP, inefficiencies can still be found at every stage of the deal lifecycle, from deal initiation to settlement. In short, these inefficiencies are the result of having too many 'touch points' in the order initiation, execution and settlement process, each of which increases the chances of errors and the cost of manual intervention. Increasing trade volumes and the proliferation of more complex, highly-structured instruments has meant that manual and semi-automated processes, that were only just coping five years ago, are no longer up to the job. This creates an inevitable tension between the front office, wanting higher trade volumes and more complex products, and the middle and back offices which are struggling to cope. And of course, new compliance and regulatory requirements add to the data burden when processing each trade. It is worth pointing out that the ability to handle growing trading volumes, and in particular exceptional spikes of trades, is only a small element in the STP lifecycle; without being matched by intelligent business rules, it merely results in even more exceptions overwhelming back-office teams. The second installment of Risk in the Market's interview with Sebastien Jacquet will be published here shortly, so remember to check regularly for updates. Please click here to return to the  Risk in the Market  homepage http://misys.com/misysblog/2011/q4-2011/delivering-trade-lifecycle-automation-with-straight-through-processing-(stp-part-one).aspx http://misys.com/misysblog/2011/q4-2011/delivering-trade-lifecycle-automation-with-straight-through-processing-(stp-part-one).aspx Mon, 24 October 2011 13:51:00 Risk in the Market http://misys.com/misysblog/2011/q4-2011/risk-innovation-partnering-with-microsoft’s-sql-server.aspx Welcome back to the Risk in the Market's Innovation series. In this post we wanted to highlight the mutually beneficial partnership we have formed with Microsoft, and the impact SQL Server has had on the future direction of our technology architecture. INNOVATION IN RISK'S FUTURE TECHNOLOGY ARCHITECTURE When it comes to discussions about the future direction of our technology architecture, our focus is always on long-term value. Technology projects can be complex, costly and involve thousands of man-days to implement so we need to know any project will deliver technical and business benefits. Our relationship with Microsoft is possibly a sign of things to come - a mutually beneficial partnership that is beginning to deliver results. For years, we had been trying without success to extend our relational database support, adding SQL Server to our existing Sybase offering. MICROSOFT'S SQL SERVER However, in mid-2010, Microsoft approached us with a completely fresh attitude. They were determined to expand into the enterprise space and wanted to help us to surmount the hurdles that had prevented us from porting to SQL Server. Moreover, they offered to help make the system faster. It was clear from the get-go that Microsoft meant business. In about three months we had signed a  partnership agreement  whereby Microsoft would fund entirely the port to SQL Server as well as a performance improvement analysis. In addition, the company has allocated very knowledgeable senior technical people to our SQL Server project. The SQL Server port project is currently in progress, and some initial performance figures are emerging. We will be able to offer a much better return on investment to customers via SQL Server than before. This joint effort has brought both organizations much closer, both technically and at a business level. So it is natural that as we debate how our architecture will look in the coming years, that we consider the Microsoft stack as a serious candidate. While it is too early to know how deeply we will use Microsoft technologies in the future, we are impressed with the breadth of Microsoft's range of solutions. They have just about any technical module you can think of, including databases, workflow engines, highly distributed computing, OLAP cubes, RIA, cloud, CEP, etc. Moreover, all these technologies integrate well and promise much higher development productivity as a result. THE WAY FORWARD FOR RISK With this move, we need to experiment and learn within the bounds of a small but fast-moving use case that can be a self-contained business, to probe both the technical and commercial implications. While no final decision has been made, we are attracted to projects around  Kondor+ Essential  (our offer for small banks where we strip out a lot of complexity from Kondor+ and offer it either hosted or as an appliance). So we are in discussions with Microsoft to define what it would take, for instance, to put Kondor+ Essential on the Microsoft Azure cloud. Where will all this lead? Nobody can tell, but for now we are focused on initiatives such as offering Kondor+ on Azure - concrete deliverables that are commercially significant and teach us how to structure the next level of exploration. We'll keep you posted as things progress. Please click here to return to the  Risk in the Market  homepage http://misys.com/misysblog/2011/q4-2011/risk-innovation-partnering-with-microsoft’s-sql-server.aspx http://misys.com/misysblog/2011/q4-2011/risk-innovation-partnering-with-microsoft’s-sql-server.aspx Fri, 04 November 2011 14:00:00 Risk in the Market http://misys.com/misysblog/2011/q4-2011/solvency-ii-–-valuating-assets-and-liabilities.aspx The fifth instalment of our series on Solvency II will take look at the challenges associated with generating market consistent valuations for assets and liabilities. SOLVENCY II - MEETING THE CHALLENGES Often referred to as "Basel for insurers", Solvency II shares some similarities with the banking regulations of Basel II. However, unlike Basel II, the new directive for the insurance industry requires market consistent valuations of assets and liabilities. Although seen as an improvement, this stipulation carries challenges as insurance liabilities, which represent a main part of the insurance balance sheet, can be difficult to evaluate. THE CHALLENGE OF VALUATING ASSETS AND LIABILITIES Before moving on to look at the challenges, it is important to define precisely what we mean by assets and liabilities within the sphere of insurance. The term 'assets' relates to cash, bonds, loans, mortgages, equity, real estate and investment funds. The corresponding liabilities are anything that give rise to cash flows on the insurance side, such as life, non-life or health, and can range from a single insurance policy to an entire book of insurance business. Mark-to-market valuations As mentioned above, Solvency II relies on market consistent valuations of these assets and liabilities. For many assets and some liabilities, the valuation will be based on mark-to-market. To speed up this process and to ensure consistency, companies can store all their banking and trading book deals within a  Solvency II solution  composed of a front office and risk management system. Pricing occurs within the source system as banking book deals are directly mapped into the front office component. This is also where pricing of trading book deals is carried out. Mark-to-model valuations Problems arise when a market valuation is unavailable. In this scenario, a mark-to-model valuation is used. However, it is vital insurers adopt techniques that guarantee consistent valuations. Life insurance liabilities make up the main part of an insurer's balance sheet and can cause a number of issues when it comes to the pricing process. The challenge insurers have is that they must gather exposures from different businesses. The cash flows then have to be projected in line with the behaviour of both the policy holder and management of the insurance company. As these calculations are time consuming, they are not conducive to the rapid reporting turn around associated with Solvency II's frequent valuation of assets and liabilities. However, a solution to this problem is the replication portfolio approach. REPLICATION PORTFOLIO OPERATIONAL MODEL To achieve market consistent valuations, an insurer should create a portfolio of assets that closely replicates a portfolio of insurance liabilities. Based on a set of risk neutral scenarios, liability cash flows are computed, discounted and averaged to provide a consistent estimation of the corresponding market values. Building a replication portfolio and its advantages Building a replication portfolio can be achieved by following these steps:   This replication model can also be used as a proxy for a company's liability portfolio in economic, regulatory, hedging or other asset-liability management analyses. Producing a replication portfolio model offers the insurer a number of advantages when it comes to Solvency II compliance. It is fast, therefore drastically reducing the time needed to carry out market consistent valuations of life insurance liabilities. It provides the insurer with a single framework that can generate the additional risk measures as required by Solvency II. It increases market risk capabilities that are available in different business units. Plus, it creates better benchmarks that can be used by both internal and external investment managers. Finally, it creates a significant competitive advantage in areas such as product development and pricing. Insurance companies will be able to make better and faster decisions about capital allocation and will be in a position to take advantage of any market efficiencies. So far, we've looked at the challenges involved with  data management  and the valuation of assets and liabilities, but what about risk analysis? The next post in this Solvency II series looks at different risks that have to be calculated and the associated challenges and solutions. Please click here to return to the  Risk in the Market  homepage  http://misys.com/misysblog/2011/q4-2011/solvency-ii-–-valuating-assets-and-liabilities.aspx http://misys.com/misysblog/2011/q4-2011/solvency-ii-–-valuating-assets-and-liabilities.aspx Fri, 11 November 2011 10:06:00 Risk in the Market http://misys.com/misysblog/2011/q4-2011/delivering-lifecycle-automation-with-straight-through-processing-(stp-part-two).aspx This is the second of a two-part interview with Sebastien Jacquet, Thomson Reuters' product manager for K+ TP, where he discusses the problems faced by many banks trying to extend their use of lifecycle automation and straight-through processing (STP) and the main strategic goals for successful STP across different asset classes and business units. Click here to read the first part of the  STP interview . HOW DO STP 'DASHBOARDS' HELP?  Accurate and informative dashboards are critical to efficient STP, enabling the real-time monitoring and reporting of all trade exceptions. The dashboards should consolidate data sources from all stages in the trade lifecycle, giving users a single source of information on trades that haven't been automatically validated. Different users will need different dashboards, each covering a specific aspect of the trade lifecycle such as validation or settlement, supported by workflows to route exceptions to the right person or department for repairs.     K+ TP IS Thomson Reuters' SOLUTION FOR LIFECYCLE AUTOMATION AND STP - WHAT ARE ITS MAIN STRENGTHS? K+ TP is centred on standardisation, scalability, visibility, cost control, and ease of use - based on our experiences of customer implementations around the world, we believe these are the critical factors in successful STP deployments. Standardisation is vital when integrating disparate back-office platforms with a system that gives institutions a global view of their trade processes. In order to achieve this, back office processes must be standardised across each asset class and each relevant system, and encompass both vanilla products and more complex structured products. Processes must also be standardised to allow seamless communication between front, middle and back-office systems. The second goal is scalability - automation and standardisation are of limited use without scalability. A strong underlying IT architecture is needed to accommodate increasing trade volumes, accompanied by high levels of trading data transparency. The next goal recognises that it will always be impossible for banks to automate all processes 100 per cent of the time, so end-users therefore need access to the dashboards that give them visibility of relevant exceptions and the tools needed to configure some manual processes when needed. Cost control is naturally an important consideration, particularly when the addition of new instruments affects all 'downstream' applications and processes. Pre-packaged systems, such as K+ TP, address the issue of cost control and scalability and typically comprise common business rules and local variations, such as generic charts of accounts, standard accounting workflows, SSIs for all asset classes, ISDA confirmations and SWIFT messages. The final requirements are flexibility and ease of use, and these are most important when considering the end-users' experience of the system. The user interface must be easy and intuitive for front, middle and back-office staff to configure for new products and activities, as well as for day-to-day monitoring and exceptions processing. Please click here to return to the  Risk in the Market  homepage http://misys.com/misysblog/2011/q4-2011/delivering-lifecycle-automation-with-straight-through-processing-(stp-part-two).aspx http://misys.com/misysblog/2011/q4-2011/delivering-lifecycle-automation-with-straight-through-processing-(stp-part-two).aspx Fri, 18 November 2011 10:02:00 Risk in the Market http://misys.com/misysblog/2011/q4-2011/solvency-ii-–-the-challenges-of-risk-analysis.aspx SOLVENCY II - MEETING THE CHALLENGES HEAD-ON (PART 3) The arrival of Solvency II will throw up a number of challenges for the insurance industry.  Data management  and the  valuation of assets and liabilities are two of the hurdles the sector will have to clear in order to achieve compliance. But what about risk analysis and the challenges it brings? Risk analysis and Solvency II Under Solvency II, in order to understand capital requirements, different risks have to be calculated. Market and credit risk are driven by the assets side of the business, whereas insurance risk is driven by the liability side. The new directive gives companies the option of using different models to calculate their capital requirements: Standard approach   Partial internal model Company specific internal model  These models increase in complexity and sophistication, ranging from the linear and factor based standard approach (using clear definitions supplied by the regulator), to the more bespoke assessment of the internal model. Assessing market risk - standard approach By defining and applying stress tests for different risk factors, companies can apply precise upward/downward shocks to specific risk factors such as interest rates, currency, spread, equity and property. So, for example, looking at risk factors such as interest rate and equity: The capital change for the interest rate risk is calculated as the change in NPV caused by the application of specific relative shocks to all points of the curve. The capital change for the currency risk sub model is calculated as the change in FX rate of 25% (as decided in Solvency II), with impact being calculated for each currency pair separately. By implementing the Solvency II stress test standard formula in the front office component of their  Solvency II solution , companies will gain access to customised reports to ensure compliance with the reporting element of the new directive. Assessing market risk - internal model The internal model (which must be back-tested) is a more sophisticated approach that covers both quantitative and qualitative requirements set by regulators. This holistic approach means, for example, that the 'use test' requires the internal model to be fully integrated within the management of the business, covering all areas such as pricing and product development, reinsurance strategy, risk and performance management. The aim is to ensure the operational risk assessment isn't just implemented to determine the regulatory capital requirements, but is actually embedded in the risk management practices of the firm. In addition to covering all the material risks to which the company is exposed, internal models are also used to determine economic capital requirements and must be supplemented by scenario analysis and stress testing in order to capture the impact of extreme events. Liquidity risk Insurance companies tend to be less exposed to liquidity risk than banks because they don't rely on short-term funding. However, since the credit crunch of 2008, some insurers have experienced liquidity problems due to:   As a result, regulators expect improved liquidity risk management practices, including liquidity stress testing, contingency funding plans and a push towards a quantitative approach. Therefore, insurance groups must integrate insurance, banking and trading book positions if they are to manage their global liquidity positions. Reporting issues One aspect of Solvency II crops up time and again when looking at the new compliance issues. Under the new directive, companies will see a huge increase in reporting requirements. Our final post in this series will look at the challenges insurers will face to ensure compliance with this issue. Please click here to return to the  Risk in the Market  homepage http://misys.com/misysblog/2011/q4-2011/solvency-ii-–-the-challenges-of-risk-analysis.aspx http://misys.com/misysblog/2011/q4-2011/solvency-ii-–-the-challenges-of-risk-analysis.aspx Fri, 09 December 2011 00:00:00 Risk in the Market http://misys.com/misysblog/2011/q4-2011/risk-innovation-a-new-way-of-thinking-about-kondorplus.aspx This post is the third in Risk in the Market's Innovation series. The next two posts in this series will focus on our drive to increase compatibility between our products, the initiatives that have come out of this, and the impact they have had on our products. INCREASING COMPATIBILITY  The RISK Innovation team has been working hard to increase the compatibility of our products and improve their ability to 'talk to each other'. Improving compatibility between  Kondor+  and KGR will simplify client projects and strengthen our products' architecture; ultimately of benefit to both us and our customers. This drive for compatibility has led us to take a deep look at how our products work, particularly Kondor+. Rather than searching for incremental, quick solutions for increasing compatibility, we have explored new, very different ways of architecting Kondor+. We deliberately started from a premise of asking: what is the right, ideal design for Kondor+? Only subsequently would we worry about how implementable it was, or how it might fit with the reality of our Kondor+ code base. This was a deliberate, conscious effort to liberate ourselves from our historical prejudices, in terms of Kondor+'s architecture. NEW INIATIVES FOR KONDOR+ Two important initiatives came out of this new way of thinking and will be delivered as part of our Kondor 3.3 release: The first is the result of an analysis of how simulated pricing should be done in Kondor+. We call this analysis T1 T2 T3, for reasons that will be explained in a future post.  A concrete outcome of this is that for, the first time, we will be offering the possibility of pricing an instrument in Kondor+ with any model. Functionally, this is part of our openness initiative, but it is more than that: it is a re-architecting of how we price in Kondor+ in a way that will deliver not only openness, but also servitized pricing and highly-parallelized pricing. The second is an inquiry into how different applications should talk to one another - if we banish the Agent software that we use to link Kondor+ and KGR for credit legs, what should replace it? Our team has done some very persuasive prototyping on this question, introducing us to gentler scripting technologies such as Groovy. We have started applying the power of Groovy into better compartmentalization between our products. This is all very exciting, and worth talking about more. Future postings will share some more details on how these initiatives are progressing, and what they portend for the future. Please click here to return to the  Risk in the Market  homepage http://misys.com/misysblog/2011/q4-2011/risk-innovation-a-new-way-of-thinking-about-kondorplus.aspx http://misys.com/misysblog/2011/q4-2011/risk-innovation-a-new-way-of-thinking-about-kondorplus.aspx Fri, 02 December 2011 00:00:00 Risk in the Market http://misys.com/misysblog/2011/q1-2011/looking-forward-risk-in-the-market’s-interview-with-boris-lipiainen,-global-head-of-product-and-development.aspx 1. What have been the major issues for your clients over the past year?  In the last 12 months market conditions remained challenging for our customers. Even with the recovery period underway, uncertainty still lingers in the background and there are some major re-adjustments are taking place. In the developed markets the shift to flow products, higher volumes, and lower margins continues as expected. That puts consolidation and simplification pressure on the entire technology stack supporting trading and risk management activities. The post-crisis wave of regulation has finally hit the shores in Europe and the US, although the full impact of it is yet to be evaluated. But one thing is clear - trading business will become more difficult. The bar will be raised for all players in terms of capital adequacy, regulatory compliance, and overall rigour with respect to managing the risk - the industry as a whole is moving towards risk-adjusted P&L management. There's a renewed focus on operational risk and front-to-back processes, which again and again prove to be a major source of financial risk - just look at the latest "robo-signer" crisis wave in the US. All that is both bad and good news for the technology vendors. It is bad because the uncertainty of recovery and continued aftershocks suppress earnings and therefore spending. It is good because the renewed focus and higher rigour with regard to risk-adjusted P&L management and front-to-back operations give the market leaders an opportunity to consolidate and build stronger relationships with their customers. At the same time emerging markets continue to be an area of growth. Although not exposed to the turmoil as badly as their Western counterparts, banks and regulators in the emerging markets learn the lessons and are "tooling up". We see strong demand for trading and risk management solutions across this space. Increased pressure from regulators in China, India, South-East Asia drives demand for Enterprise Risk management solutions. Many emerging market banking leaders in Russia, Gulf, Latin America are tooling up their trading desks and back-offices. Whole new countries are coming to the global capital markets - Vietnam, Kenya, Colombia just to name a few recent ones. 2. What have you done in terms of your technology to help your clients address these issues?  In the trade and risk management segment we continue to invest strongly in Kondor+, which is a market leading cross-asset front-to-back solution. In April 2010 we delivered version 3.2, which was extremely well received. It delivered expanded asset class coverage including Commodities and Inflation, improved analytic coverage of Credit and exotic FX options, improved liquidity management with our new Treasury Manager module, flexible workflow management, full bi-directional integration with Excel, a comprehensive library of standard and re-usable back-office configurations, support for x86 platform which delivered 40 - 80% performance improvement at a fraction of running cost, and many other things. All in all, it is a great value for money for our customers and we had first customers going live on Kondor+ 3.2 as early as July 2010, only 3 months after its general availability. Overall, we now have more than 150 live customers live on the 3.x generation of Kondor+ and the majority of the rest have already committed to an upgrade in 2011. We also continue to win new deals and new territories - this year we won new customers in Vietnam, Kenya, Colombia, Chile. We also continue to significantly develop our relationships with our existing customers. In the enterprise risk segment, we see a continued rapid growth for both of our solutions - KGR and TopOffice, driven by the fundamental changes in the discipline of risk management and regulation. KGR, our integrated Market and Credit Risk Management solution, continued its strong growth trajectory and added many new clients. Last year we significantly increased KGR functional coverage to include Stressed VaR, VaR Explain, Potential Future Exposures, Credit VaR, Regulatory Capital (IMA), Banking Book integration among others. We also validated its Distributed Risk architecture with many major clients that are using KGR across multiple front-office systems. It was a very important year for TopOffice too. It went live as a cross-asset risk dashboard at a major client, covering a portfolio of 40+ strategies and some 250,000 positions. At this particular client TopOffice truly justifies its name, being used by the executive management team to gain better insight and control over their arbitrage trading business. TopOffice delivers a powerful and flexible risk aggregation technology, combined with advanced Risk, P&L, Liquidity analytics and Stress Test Scenario engine. This combination gives the heads of trading businesses a unique ability to implement a near real time dashboard with consistent and accurate forward looking simulation capability across their entire business portfolios. In many ways risk management is becoming a front-office discipline and TopOffice provides this capability in the way that is familiar to front-office users. 3. What do you see as the major issues that will confront your clients in the next 12-18 months, and how are you evolving your technology to support your clients?  Again, we should speak separately about trading and enterprise risk management. In the trading world, we see the continuation of the current trends: Shift to flow products and margin erosion resulting in consolidation, simplification of supporting infrastructure and operating models. Many of our leading customers are going through operating model reviews with pretty fundamental consequences for their system landscapes over the next 2-3 years Growth of value-added "customer self-service" venues such as single dealer platforms (SDPs) Leveraging best practice components such as pricing analytics, market data management, trade capture, etc. across the enterprise Increased attention to front-to-back workflow management to reduce operational risk and improve cost per trade economics Continued product innovation but avoiding the pitfalls of local valuation and back-office support which led to the heavy write-offs in 2008-2009 To support that we have reinforced the strategy on which we embarked upon in Kondor+ 3.2. This was recently reviewed and unanimously approved by our Customer Advisory Board, which consists of 15 of our major customers. This strategy guides the development of our next major version - Kondor+ 3.3 (due out in Q4 this year) and the subsequent versions. At its core it's based on five key principles: Turning Kondor+ into a true service platform, which can be leveraged widely across the business by the means of rich internet applications (RIA) user interfaces, Excel, Java applications, Web Service APIs Analytic and market data extensibility, which allows flexible integration with third-party or proprietary pricing analytics and market data generation for any/all trades in Kondor+ Extending our front-to-back workflow beyond the boundaries of the application to support single dealer platforms, customer portals, etc Ease of deployment throughout the solution, including simplified technology stack, less integration, more packaged / re-usable configurations, better monitoring, global deployment capabilities Performance and scalability to cope with rapidly growing volumes and consolidation in a cost-effective way The enterprise risk management world continues to be a very fast evolving space. While no one knows how it will actually look 2-3 years from now, the contours of the "next generation" are emerging. We believe it will be all about Enterprise Risk Intelligence (please read the paper by Philippe Carrel on this topic).  In short, it means a fundamental switch towards Executive Management Committees which: Understand the causal drivers of exposures and sensitivities behind business plans Are able to challenge and stress-test assumptions behind the business plans and uncover firm-wide vulnerabilities Are empowered with analytical tools that aggregate enterprise wide risk data so as to permit consistent and accurate forward looking simulations Are managing their firms on risk-adjusted P&L basis We are pioneering many highly innovative solutions - just now we finished the development of KGR 3.6T ("T" for Transparency), which will go to market during Q2 2011. It introduces several new technologies which deliver a completely new quality of user experience - a super-fast vector storage technology which allows aggregation / re-aggregation of tens of billions of data points in the matter of seconds and a very powerful and intuitive user interface, which helps risk managers quickly identify changes to exposures and P&L and drill into the root causes of these. In TopOffice we are working closely with our customers in order to implement in practice the concept of firm-wide risk-adjusted P&L management. 4. How do you rank the following attributes of trading and risk systems in terms of importance for your clients: performance, functionality, cross asset/risk factor support, speed of implementation, support for regulatory compliance?  We believe it's wrong to prioritise these - all are important. If you allow an analogy with the military: the best battle tank is not the one with the biggest gun or thickest armour. The best battle tank is the one which offers an optimum combination of firepower, protection, mobility, durability, and command and control capabilities. The same logic is applicable to other engineering solutions designed to address complex, multi-factor, and dynamic problems whether these are modern battlefields or trading and risk management. 5. What attributes have contributed most to your company's success over the past year?  As above, it is the optimum balance of these (and a few more) characteristics that we always try to maintain. Every decision about every new release of our solutions is a deliberate and thorough process of finding the right trade-off between functionality, openness/extensibility, cross asset/risk factor support, user experience, speed of implementation, performance and scalability, regulatory compliance. In this process we involve the best experts we have around the business as well as our customers. Our Customer Advisory Board meets for two full days every year to act as a steering committee for our products. Between the annual meetings, most board members are actively involved in workshops and proof-of-concept projects, which we do in the run up to a commitment to every new release. We also actively involve our customers around the world. This year we ran 9 regional customer forums, which were attended by our product leadership team in order to outline our product strategy and gather the local feedback and requirements. In addition, our consultants work with customers every day of every week - at any point in time we have more than 100 projects running worldwide. Altogether, this is a fantastic mechanism to stay in touch with our customers, which we try to use to its full potential when we make our product strategy and investment prioritisation choices. This is also one of the main reasons why our customers vote for Thomson Reuters in the numerous awards that we have won over the years. Please click here to return to the  Risk in the Market  homepage http://misys.com/misysblog/2011/q1-2011/looking-forward-risk-in-the-market’s-interview-with-boris-lipiainen,-global-head-of-product-and-development.aspx http://misys.com/misysblog/2011/q1-2011/looking-forward-risk-in-the-market’s-interview-with-boris-lipiainen,-global-head-of-product-and-development.aspx Tue, 29 March 2011 15:17:00 Risk in the Market http://misys.com/misysblog/2011/q1-2011/the-impact-of-basel-iii-in-perspective.aspx BASEL III, THE NEW RULES Under  Basel III 's new rules, capital efficiency is no longer a mere function of return and leverage. The ability to collect information and process trades directly impacts the volume and breadth of activities a bank carries out. The convergence of multiple regulations has meant that banks are conducting enterprise-wide risk aggregation on an unprecedented scale. This is necessary in order for banks to re-qualify trades versus hedges and optimise capital utilisation. Over the medium and long term, regulation has become an incentive for banks to diversify in wealth management and retail banking… In an attempt to fix what was identified as the key deficiencies of the previous regulatory frameworks,  Basel III  consists of 5 main areas of change: Quality and consistency of banks' capital base, enhanced risk coverage and methodologies, maximum leverage ratios, countercyclical measures and minimum liquidity ratios.  Under Basel II, a loose definition of capital had led to a decreasing of the actual share of equity below minimum levels, through perpetual debts and other schemes made possible by the diversity of accounting rules around the globe.   Basel III  is attempting to fix this through a stricter definition of capital, raising quality and volume requirements simultaneously.   As if justification was needed, the regulators commissioned impact analyses on major economies and published modest loss figures ranging from 0.1% to 0.32%* of GDP as a median impact over 17 countries.  On the other hand, bankers generally estimate the increase of their risk weighted assets (RWA) between 50% and 100%, due to new risk assessment methodologies proposed. The negotiation is most likely to be settled through phasing and transition arrangements. OTHER PERSPECTIVES ON BASEL III Beyond the purely quantitative impact of  Basel III  on banks' equity value and GDP figures, the effect of the new rules should be looked at from the perspective of the clients of the financial industry.  How does  Basel III  eventually impact the life of a medium-sized company?  Another aspect which seems to be overlooked is the combination of multiple macro- and micro-prudential regulatory packages.  How does  Basel III  combine with the  Dodd Frank Act  (DFA) and MIFID, for example? By raising the costs of capital, regulators necessarily make lenders more selective. By increasing risk weights, the selection naturally favours highly rated institutions and collateral-rich counterparties. Inevitably, small industries and trade companies should feel a greater impact. In a November 2010 interview** John Ahearn, Global Head of Trade Finance for Transaction Services at Citi, estimates that ,under Basel II, funding small and medium sized enterprises (SMEs) required three times more capital than lending to a triple A institution.  Higher costs of capital in  Basel III  will make it worse, he says.  To compound the issue, the leverage ratios act as  de facto  caps on the total amount of business a bank can do and might further rigidify selective lending.  The ratios could also lead to focus on shorter term loans since RWA models factor an element of forward volatility, itself computed involving the square root of time. Thus longer durations theoretically increase risk. When capital drives business decisions, banks embark in RWA savings campaigns, the impact of which cannot be predicted by quantitative analysis. In particular, lenders will reconsider the quality, availability and liquidity of collateral. In the presence of leverage caps, the speed at which collateral is released and deals are settled, directly impacts the volume of transactions a bank can handle. Capital efficiency is no longer a mere function of leverage, but speed, allocation and workflow efficiency also matter. Another important perspective when measuring the impact of  Basel III , is to no longer consider it a standalone regulation, but approach it in the context of the other macro- and micro-prudential endeavours, in particular the DFA in the US and MIFID in Europe. An important part of DFA is the Volcker rule, which bans proprietary trading and involvement in hedge funds from banking activities.  The banking industry derives a very substantial share of its net profit through proprietary trading and broker dealer activities, especially since 2008 where lending activities were reduced by the credit crunch while abundant liquidity and high volatility were incentives to trade. It has been somehow surprising that banks would naturally surrender a very crucial activity of their portfolio without trying to oppose the ruling more vehemently. BASEL III'S IMPACT In reality, banks can massively rationalise what they do through enterprise-wide risk aggregation. If approached in terms of cross-asset sensitivity, a substantial share of proprietary positions, which offsets exposure arising from lending and financing activities, can be re-labelled as a hedge. Only positions in excess of the hedge shall then be deemed "proprietary" and shaved off. Banks find a great incentive to mine all proprietary and business books in search for matching sensitivities.  Moreover, a hedge is an exposure which sensitivity covers another exposure under a forward-looking "what-if" scenario.  As  Basel III  encourages to stress-test sensitivities across-divisions under adverse market scenarios as a mean to better assess liquidity and funding needs, it makes it easier to identify hedges and stress them further to net out existing positions as much as possible. In addition, reducing the overall RWA through internal matching not only spares some of the dealing activities but it minimises the costs of collateral management and hedging operations. At the cost of comprehensive overhauls of IT infrastructure, we can expect a number of Chief Investment Officers to rename as Chief (cross-asset) Hedging Officers". The impact on IT is unprecedentedly important; the more cross-asset and cross division the reconciliation, the better the chances of capital optimisation. A remaining part of proprietary activities will still need to depart from banking institutions though. Since they can't spin it off into hedge funds they control, there is a view that banks could engage in wealth management activities to compensate for the lost value. In line with DFA, the forthcoming EU regulations and MIFID promote principles of fiduciary responsibility which make investment advisers directly accountable for managing portfolios along risk profiles dynamically assessed with their clients. The skills and techniques required in terms of portfolio management and governance are actually closer to private banking business than conventional asset management. In search of alternative sources of revenue and margin, and as the demand for asset management services is expected to continue to grow in the aftermaths of the banking crisis, one can expect a new generation of wealth management services to originate from banks. As in the meantime  Basel III  and other macro-prudential supervisory rules aim at decreasing the reliance of the banking sector on wholesale funding, there is a strong incentive to re-approach retail banking services from a wealth management perspective. Just as the impact of major natural events is measured in terms of the changes they force on the environment,  Basel III  should be looked at from the perspective of its qualitative impact on businesses which depend on banks, and entangled in other regulatory initiatives as well. *Source BIS and ECB **Source Citi Contributor:  Philippe Carrel, Asset Owner Enterprise http://misys.com/misysblog/2011/q1-2011/the-impact-of-basel-iii-in-perspective.aspx http://misys.com/misysblog/2011/q1-2011/the-impact-of-basel-iii-in-perspective.aspx Thu, 24 March 2011 13:46:00 Risk in the Market http://misys.com/misysblog/2011/q1-2011/thinking-strategy-retooling-for-the-post-crisis-world.aspx Contributor: Alex Hernandez,  VP Engineering, CTO At Thomson Reuters we are constantly talking to financial institutions to feel the pulse of market trends and their impact on application technology for the capital markets. One theme in particular has been repeatedly coming across over the past few months, spanning a variety of market participants, geographies and segments. Namely, that in the post-financial-crisis world, survivors are re-focusing their business models in ways that require a servitized IT infrastructure beneath. While servitization is not a new concept and in fact IT has unpersuasively championed it for years, what is new is that the business itself is the driver this time, since it views technology as key to its existential metamorphosis. In other words, many shops are having to run twice as fast just to hang on. This is clearly not sustainable as a trend unless efficiencies are found all along the chain, from front office through middle office, operations, finance and control, and back office. And "efficiencies" are unlikely to come through additional reduction of staffing levels, which have already been significant. What is needed instead is to significantly shift the production cost curve, i.e., business increasingly requires the kind of automation that existing application silos have hindered and which hadn't mattered when margins-per-trade used to be high, but which, at our present Darwinian moment, can make all the difference.A study of the German market that we commissioned in December is typical of  trends we see in many developed countries. Banks are aggressively reducing their balance sheets and re-balancing their portfolios away from structured products towards flow products. Revenues are flat, which perversely masks the key dynamic: trade volumes have more than doubled over the past few years, which is another way of saying that margins-per-trade are down by more than half. Closely related to this, many institutions are trying to not merely avoid extinction by improving their cost structures, but also seek to thrive by providing add-on services in the hope of retaining their customers and attracting them towards higher-margin products. A good example is the focus on single dealer platforms (SDP), which are envisioned to provide much more than simply online execution of trades at efficient prices. They are in fact supposed to "open up" the bank and exhibit to customers a number of functionalities that only traders have traditionally have direct access to, such as position keeping, risk management, trade lifecycle management, financing workflows, etc.  This "self-service" model is of course a contributor to cost reduction, since it means less customer-facing staff, and could be thought of as analogous to what happened to bank tellers 30 years ago when ATMs became ubiquitous. But it is more than a pure cost-efficiency play: more fundamentally, it is a strategic move to differentiate from competitors and save customers' time by providing in a single easy-to-use portal all the financial information and workflows that customers need. Such differentiating drive is palpable also in the buy side. We have talked to a number of asset management/custodian firms in the past few months and they all express an ambition to do more than just passively hold customers' portfolios and provide daily or monthly static valuation reports. They are motivated by a simple Darwinian consideration: domiciled as they are in high-cost countries, such custodian firms couldn't compete in price with newly established custodians in emerging countries. In other words, the internet and related technologies have reduced the barrier of entry to firms that provide bare-bones custody, which can be easily commoditized in Thailand or India. So what are custodian firms to do in rich countries? Many are opting to seize the moment and develop a number of new products, such as investment finance platforms and risk management solutions which could be thought of as the buy-side equivalent of the sell-side SDPs: application platforms that enrich the customer experience in a way that retains and triggers sales of higher-margin products. When we look at these three examples (front-to-back efficiencies, SDPs, value-added services from custodians) what they have in common is the need to migrate from a situation where application business logic is siloed to one where it is servitized, so that it can be exposed, for instance, in a portal or in an investment financing workflow. Automation savings can only come through a simplification of the full application chain that must accomplish two things: reduce the number of connection points which today have to be nursed at high cost, and ensure that application business logic is exposed for flexible re-use, i.e., turn it into services to handle pricing, risk, position keeping, collateral management , trade lifecycle, etc. To the extent some of this application logic lives today in closed silos, some of it might have to be replaced. This is what financial institutions have been telling us. And we put serious credence to their views, as it is clear that the post-financial-crisis world does call for some serious existential re-thinking. That is why we are embarking on a strategic opening up of much of our application suite, so that our customers can leverage their existing investments in products like Kondor+ as they ride the next wave of industry transformation. Please click here to return to the  Risk in the Market  homepage http://misys.com/misysblog/2011/q1-2011/thinking-strategy-retooling-for-the-post-crisis-world.aspx http://misys.com/misysblog/2011/q1-2011/thinking-strategy-retooling-for-the-post-crisis-world.aspx Thu, 24 March 2011 13:34:00 Risk in the Market http://misys.com/misysblog/2011/q1-2011/from-the-biggest-regulatory-storm-in-80-years-to-an-established-regulatory-framework.aspx We have come a long way since the massive bailouts, and subsequent calls for stricter regulation.  The dust is finally starting to settle.  However, as the new regulatory framework becomes established, many institutions are grappling with the impacts. The regulatory framework in place by 2006 failed to prevent the worst banking crisis since the Great Depression.  Even financial institutions with seemingly safe capital ratios experienced severe problems.  In November 2009, Federal Reserve Chairman Ben Bernanke reported to the Financial Crisis Inquiry Commission, that twelve of thirteen of the most important U.S. financial firms were at the edge of failure at the height of the credit crisis in 2008.  The mechanics of the new regulations are well documented.  Our G20 leaders mandated global regulatory reform in Pittsburg in 2009 and Seoul, in 2010.  In December 2010, the BCBS (The Basel Committee on Banking Supervision) published the details of global regulatory standards on bank capital adequacy and liquidity.  These new standards will be phased in gradually until 2019, with some aspects such as the liquidity and leverage ratios still currently subject to calibration. What is now termed Basel III [1]  includes many significant adjustments to Pillars 1, 2 and 3 of the prior Basel II accord.  The higher capital and liquidity standards introduced by Basel III are intended to reduce not just the probability, but also the severity of banking crises. The impact of the new regulation includes: a significant increase in the amount and structure of minimum regulatory capital, as well as three new regulatory constraints - a leverage ratio and two liquidity ratios. If simulation models are used to compute regulatory capital, they will need to be calibrated to periods of significant stress within a bank restrictions on business activities including proprietary trading, OTC derivatives and securitizations, in terms of capital requirements stricter monitoring on the independence of a firm's risk function, and the prioritization of risk management at board level higher levels of monitoring and restrictions on systemically important financial institutions (SIFIs). COMPLIANCE Compliance with the new rules and reporting requirements is an essential first step.  Any potential sanctions imposed on a firm by regulators, would be a show-stopper for business.  Furthermore, a firm's reputation amongst its clients and peers will also be at stake. Firms will need systems and calculators to compute minimum regulatory capital, for standardized models, and sophisticated simulators in order to qualify for advanced internal models. As part of their ICAAP (Internal Capital Adequacy Assessment Process), firms will be required to operate systems that provide comprehensive and timely identification; measurement and monitoring; and control and mitigation of risks.  As we move forward, the aggregation of risks (including hedging effects and highlight concentrations) across old traditional silos will be a prerequisite for compliance. Although it is not mandatory, in practice, firms need to take stock of their system infrastructure.  In addition to meeting current regulatory requirements, a system needs the flexibility to adapt to any future regulatory fine-tuning, or change in best practice.  We are also likely to see a number of banks streamlining their systems landscape, and implicitly the amount of mapping rules they need to maintain.  This will not only improve overall transparency, but also help to free up budgets. STREAMLINING THE BUSINESS The new regulatory framework is forcing banks to review their business models. The cost of keeping capital aside that could otherwise be used to generate profit raises questions on the future viability of certain business activities.  Proprietary trading, securities lending, OTC derivatives, and securitizations will be restricted or strongly penalized.  Commercial and wholesale banking activities will need to reduce illiquid assets, and limit wholesale, and other sources of unstable funding - or pass on the increased cost of capital to their clients. In order to allocate capital to the most profitable areas of business a bank's management will need timely and consistent views of their global activity: what their potential risks are, how much regulatory capital they consume, and how the risks can be mitigated. REAL-TIME The crisis illustrated that an institution's stability could change over night.  In adverse trading environments, decision-makers need to  review their risk profile as the market evolves, and make quick assessments, to protect or decrease their exposure. This means having the capability to get consolidated views of risk positions; price positions; run what-if scenarios on these positions; and run regular risk simulations.  In addition to this, there is the increased scrutiny from shareholders who need reassurance that the risks being taken are in line with the agreed risk appetite and return expectations. The need to track risk with multidimensional complexity, to play through different future strategies, and make informed decisions about risk/reward trade-offs, is driving the development of real-time risk management systems.   By real-time, we mean the capability to have an instantaneous view of business at any point in time, whenever this is asked for, and as granular as needed.  In addition to detailed, on-demand information, real-time systems will also enable ad-hoc scenario analysis.  For example, to quantify the change of a risk profile should a given market event happen, or to measure the impact of an individual trade on the P&L distribution. An important point which relates to the new regulatory framework, and which should not be overlooked, is that a good system can save considerable amounts of time.  Real-time reporting, can free risk managers from daily operational processes and standard reporting, to focus on complex issues like evolving business topics, and nonstandard queries. CONCLUSION Financial institutions are all preparing for changes in regulation and governance: from top-tier banks looking to manage their exposures and regulatory requirements across multiple platforms and geographies; to European mid-tier banks; and banks in emerging countries who are getting up to speed with regulation. Tomorrow's front- runners will be the firms that can evolve beyond pure compliance, to embed risk management processes into their business practices, in a way we have not seen before. Contributor: Ulrich Schanz, Senior Functional Architect Please click here to return to the  Risk in the Market  hompage http://misys.com/misysblog/2011/q1-2011/from-the-biggest-regulatory-storm-in-80-years-to-an-established-regulatory-framework.aspx http://misys.com/misysblog/2011/q1-2011/from-the-biggest-regulatory-storm-in-80-years-to-an-established-regulatory-framework.aspx Thu, 24 March 2011 13:21:00 Risk in the Market http://misys.com/misysblog/2011/q1-2011/noor-islamic-bank-achieves-real-time-var-and-highly-scalable-stp.aspx Noor Islamic Bank, a leading Shari'a-compliant bank in the United Arab Emirates, has adopted a comprehensive market and credit risk infrastructure from Thomson Reuters for real-time risk management across its trading operations, including limits monitoring and VaR for all asset classes. Innovative Shari'a-Compliant Products Noor Islamic Bank provides a full range of banking, investment and risk management products and services for both private and corporate customers as well as government institutions. Noor commenced Shari'a-compliant banking operations at the start of 2008, with its treasury division dealing in a wide range of asset classes including forex, money markets and fixed income. As a demonstration of the bank's innovative approach, it has even developed Shari'a-compliant derivatives products (OTC forex options and profit-rate swaps). Greenfield Opportunity The 'greenfield' status of Noor gave it an unrivalled opportunity to develop an organization-wide technology program to automate its front-to-back treasury processes and implement straight-through processing (STP). By streamlining its treasury processes, the bank wanted to reduce costs and implement a risk management infrastructure that could measure and monitor real-time credit, settlement and market risk and meet the regulatory and capital requirements demanded by both Basel II and the UAE Central Bank. Sami Ainous, Head of Treasury and Trading Technology at Noor Islamic Bank, explained, "One of the key requirements for our treasury operations is the delivery of real-time risk management including limits monitoring and value at risk (VaR) reporting across all asset classes." Even before Noor's introduction of structured products, the treasury module in its existing core banking systems was unable to cope with the complexity and volume of Noor's standard financial instruments. The new treasury system needed to be flexible enough to support the future introduction of further complex products as well as being capable of scaling with growing trading volumes. Coping With Market Uncertainty 2008 highlighted the need for the bank's decision-makers, such as traders and heads of desks, to have real-time access to accurate portfolio information in order to make rapid and well-informed decisions, particularly during periods of market turmoil. Ainous added, "VaR gives us a clear understanding of the probable profit and losses across our portfolio, based on in-depth statistical analysis of historic prices and market volatilities. VaR lets us view our risk in real time and is a vital factor in determining all of our trading and hedging strategies." Rigorous Selection Process After Noor undertook a thorough review of potential suppliers followed by a rigorous RFI and RFP process, it chose the Thomson Reuters Kondor+ and Kondor Global Risk (KGR) solutions. Ainous said, "We chose Thomson Reuters on the basis of both quantitative and qualitative selection criteria. First, Thomson Reuters achieved one of the highest scores during the RFI and RFP selection processes. Second, we were attracted by Thomson Reuters presence in the Middle East, its pricing and commercial terms, technical support capabilities. Furthermore, we were impressed by their asset and instrument coverage and their vision for Islamic banking." Flexible Pricing and Deal Capture To help address these challenges, Thomson Reuters successfully implemented Kondor+ and KGR. Based on a three-tier service-oriented architecture, the solutions gives Noor a sophisticated and flexible means of pricing and capturing deals, real-time position keeping and managing credit and market risks. Kondor+ enhanced functionality also enables 'follow the sun' trading and global risk management across different business units. KGR comprises three main components - limits management, credit risk and market risk, all of which were installed at Noor. The credit and market components use an internal model method (IMM) to simulate historic VaR for Noor's treasury book. Importantly, KGR ensures pricing consistency between front- and back-office systems and risk management systems by consolidating all pricing functions within Kondor+. Noor favored a phased implementation, with Kondor+ and KGR deployed in September 2008 followed by Kondor+ back-office module in September 2010. This module extends to the back office all of the asset classes supported in Noor's front office for greater operational efficiencies and consequent cost and operational risk benefits. Narrowing the Gap The long-term partnership between Noor and Thomson Reuters is a clear demonstration of how Islamic banks, while being governed by Shari'a principles, are achieving both business and technological success and narrowing the competitive gap with 'conventional' banks in terms of STP and risk management. Advanced Risk Management Strategies Ainous said, "The KGR implementation for VaR has enabled us to develop advanced strategies for measuring risk and performing complex market risk computations, with a particular emphasis on meeting Basel II requirements. This has all been achieved within the constraints of our existing IT infrastructure." The system also gives Noor both business agility and competitive advantage as the risk management platform substantially increases the speed with which new financial products can be developed and launched, including STP integration with all front- and back-office systems. Furthermore, Noor is now one of very few regional banks and even fewer Islamic banks to have achieved real-time risk management using historic price and volatility simulations. Commenting on the impact of the Thomson Reuters risk management infrastructure, Ainous said, "The Kondor+ platform is working very well. With transaction volumes growing by 120 per cent year-on-year, we have stressed the system and we know that we can scale it to cope easily with increased volumes without needing extra staff - that's the power of the system's straight-through processing capabilities." Ainous said, "The KGR implementation for VaR has enabled us to develop advanced strategies for measuring risk and performing complex market risk computations, with a particular emphasis on meeting Basel II requirements. This has all been achieved within the constraints of our existing IT infrastructure."  Key Benefits Real-time risk management including limits monitoring and value at risk (VaR) reporting across all asset classes Internal model method (IMM) analysis of historic prices and market volatilities Pricing consistency between front- and back-office systems and risk management systems Global risk management across different business units and 'follow the sun' trading Support for Shari'a-compliant derivatives products (OTC forex options and profit-rate swaps) Compliance with regulatory and capital requirements demanded by Basel II and the UAE Central Bank Please click here to return to the  Risk in the Market  homepage http://misys.com/misysblog/2011/q1-2011/noor-islamic-bank-achieves-real-time-var-and-highly-scalable-stp.aspx http://misys.com/misysblog/2011/q1-2011/noor-islamic-bank-achieves-real-time-var-and-highly-scalable-stp.aspx Thu, 24 March 2011 13:20:00 Risk in the Market http://misys.com/misysblog/2011/q1-2011/meet-the-team-matt-gaywood,-global-head-of-operations.aspx Matt Gaywood talks about his role at Thomson Reuters Risk Management and the challenges of delivering front line services globally… Tell us about your role In 2008, Thomson Reuters created my role as Global Head of Operations to provide a single view across our regions.  I am responsible for making sure that we provide a consistent and optimal level of service across both project delivery and front line customer support.  We have over 400 staff in 46 countries across 60 sites.  So it is vital to leverage our global scale to best support these activities.  A good example is our Client Services Team, who provide first line customer support. They originally sat in small, independent local teams and now exist as a single global team with a unified view of customers.  While they maintain a local presence, they can now provide 24×5 support, with the capability to manage service requests within or across time zones. The new structure is extremely powerful and the number of service requests resolved locally has increased three fold.  Customers are seeing real changes in the service they receive, with much faster resolution, and greater visibility of their queries.  As risk management becomes more complex, and our solutions increasingly sophisticated, we continually look to evolve our service delivery model to meet these changes. How would you describe a successful solution implementation? Projects should not be viewed purely as technical installations.  The installations themselves represent a small part of the overall programme for customers.  How well we deliver business benefits is the real measure of success.  Therefore, it is pivotal to focus on the original business goals to ensure customers fully understand how best to use and exploit the solutions we provide. Successful projects have three key elements; clearly defined goals, clear accountability at all levels and honest and frank communication.  If any one of these elements is lacking a project will inevitably start to drift. When a project goes wrong, it is always linked to the fundamentals: whether the project was initiated in the right way, or whether the parties were communicating all the way through it.  You can whiteboard a hundred and one different reasons why a project went wrong, but 99% of them usually get grouped under communication issues.  If a project starts in the right way, with the right people and the right engagement, then you are well on your way to success.  Project success is dependent on good project management - both the on customer and the vendor side.  This means focusing on the business goals, holding people to account, and ensuring clear communication between the key stakeholders.  Then, taking a lead and making decisions based on the project priorities.  A skilled project manager needs to be able to take ownership of a project, and be accountable for its outcome.  We have over 450 clients globally, with over 100 projects under way at any one time.  Many of these projects are long and complex, and need exceptional project management to make sure they succeed.  Can you tell us about your background? Aside for a year out to complete my MBA, I have worked at Thomson Reuters since 2001.  I started as a management consultant working for PriceWaterhouseCoopers; then crossed the void to work directly for Thomson Reuters on post-acquisition integration projects in 2004; and subsequently joined Risk Management in 2006. My background is in project and program management across military, financial and business transformation programmes.  After university, I served a commission in the Royal Marines, which helped to get all my youthful bugs for adventure and travel out the way.  The experience also provided a terrific learning ground for the business skills I would depend on later -  people and task management; focusing on the end goal; and of course, constant change management.  A period managing finance change programmes for an international retailer, eventually led to a management consultancy role at PWC. What aspects of your role make it all worth it for you? The great thing about my role is that I get an incredibly rounded view of the business.  It provides the chance to see the successes, as well as the areas where we face challenges.  I really enjoy the problem-solving element of what I do - whether there is an issue to resolve, or a change for good, for me it is a problem to solve.  Lastly, while I often take this for granted, it is humbling to work daily with incredibly skilled and capable people, across a range of cultures.  So these are aspects of my job that keep me motivated. How you do to get away from it all? Well, unfortunately, knee problems ended my running a few years ago.  However, I discovered rowing while supporting my son and now, rather than stand on the river bank watching, I get onto the water whenever possible. Besides the physical demands of rowing, I was surprised by how technical the sport is.  As a way of escaping from it all, it offers an enjoyable mix of being out on the river, keeping fit, and learning new things. Of course, there is a great social side to it too! Please click here to return to the  Risk in the Market  homepage http://misys.com/misysblog/2011/q1-2011/meet-the-team-matt-gaywood,-global-head-of-operations.aspx http://misys.com/misysblog/2011/q1-2011/meet-the-team-matt-gaywood,-global-head-of-operations.aspx Fri, 25 March 2011 13:07:00 Risk in the Market http://misys.com/misysblog/2011/q1-2011/corporate-treasury-–-the-new-playing-field.aspx CONTRIBUTOR: YAN DE KERLAND, HEAD OF PRODUCT MANAGEMENT, CORPORATE TREASURY We launched the  latest version of KTP  in November.  The responses from a selection of our 6,600 users running their corporate treasury operations through KTP, have been extremely positive.  These clients have all seen their landscapes change significantly over the past two years.  Pre-crisis access to credit is a distant memory.    Access to liquidity remains a hot topic across the board.  In the current environment, companies have little choice but to rethink their approach to liquidity practices, and how they manage their group cash-balance.  It really comes down to the cost of funding - almost every situation we see is linked to this issue.  This new playing-field, has forced both companies, and their banking partners, to reassess their priorities, and adapt their business strategies.  There is no doubt that companies have responded to these internal and external pressures by investing in technology.  We have seen this with the KTP web component.  The number of users was 20-30 per company a few years ago; whereas now, we see an increasing number of corporate treasury structures with several hundred users.  In the previous quarter, we started the implementation of a corporate treasury function for the world's largest global utility company.  The new company is made up of two Thomson Reuters clients, and, due to the merger, their corporate treasury structure was put out to a competitive bid.  Our team was thrilled to have won and to have the opportunity to work with these clients again.  The merger has created a corporate treasury function with similar volume and complexity to a medium sized bank.  What stands out most, with this client, and with other clients across the globe, is the value that clients can gain from a proven and fully integrated treasury management system.  In the new playing field, we are seeing a more proactive approach to efficiency and growth through: VISIBILITY & CONSOLIDATION Accurate cash flow forecasting remains critical, and can only be achieved through timely and reliable exchange of data across the organization.  A real or near real-time visibility of liquidity reserves is key to optimizing business operations.  Companies can achieve this by using tools that integrate with existing infrastructures, and that can be deployed quickly between the central treasury and remote affiliates or regional treasuries.  However, they must keep in mind, that a software solution is only part of this evolution.  It is equally important that their internal and external processes adapt alongside any new technologies.  Banking partners have a strong role to play in the new landscape.  As working capital management improves, and centralization becomes more commonplace, banks need to rethink their services and geographical contribution.  Should relationships become more centralized and closer to headquarters?  Alternatively, should they remain local to better enable local access to credit?  The next couple of years will most certainly result in strong innovation, in this area. RISK MANAGEMENT & TRANSPARENCY Today's risk management components include not only foreign exchange and interest rate risk, but counter-party risk too: will my counter-party stay in business?  Both suppliers and banking partners are under scrutiny as companies are increasingly vigilant of their cost of capital, through credit lines fees, spreads and the overall cost of funding. Systems need to be able to feed treasuries with reliable data and risk management analysis, so that company executives can really trust the figures produced, and clearly understand the risks and returns.  It is all about the need for better visibility.  Where are the risks?  How big are they?  Regulatory compliance plays a strong role, and once again, the role of technology is critical. CONNECTIVITY & COSTS Limited resources and budgets, are forcing companies to approach their business with stronger cost controls and a keener service ethics.  They need to become more dynamic and agile.  In today's global business environment, when decisions need to be made quickly, systems can be powerful enablers that help bring consistency and reliability. Therefore, from a technology standpoint, companies need to focus on developing integrated corporate treasury systems that can: consolidate and centralize data, and strengthen risk management and connectivity, to enable robust and dynamic business strategies. Please click here  to return to the  Risk In the Market  homepage. http://misys.com/misysblog/2011/q1-2011/corporate-treasury-–-the-new-playing-field.aspx http://misys.com/misysblog/2011/q1-2011/corporate-treasury-–-the-new-playing-field.aspx Fri, 25 March 2011 12:57:00 Risk in the Market http://misys.com/misysblog/2011/q1-2011/risk-management-–-out-and-about.aspx RISK MANAGEMENT NEWSLETTER: RISK IN THE MARKET Risk Management has had a great start to 2011 with the announcement that one of the World's leading banks have decided to manage their entire liquidity operations on our new product TopOffice. We have also received recognition as the overall best risk technology vendor at our industry awards and the Best Vendor for Dealing Technology by FX Week. I am delighted that the second edition of Risk in the Market provides me with the opportunity to share some of this excitement with you.  A lot has happened in the six months since we published the first edition of our online magazine/blog. Looking back to November and the risk awards, the first thing I would like to say is Thank You - to everyone who helped us win Risk Magazine's 2010 technology survey.  As a result of your support, Thomson Reuters was ranked as the Number One Risk Technology Provider, after being placed in the top three positions, in 23 separate categories, including  eight first  place wins .  MARKET DRIVERS Six months is a long time in our industry, and in this issue of Risk In The Market our Global Heads of Product Development and Technology, Boris Lipiainen and Alex Hernandez, talk about what they see as some of the key market drivers in Trade and Risk Management for the year ahead.  The articles provide a fascinating insight into how we are developing our business and I encourage you to read them.  What is clear is that there is no shortage of opportunities for us to take advantage of in 2011.  A full list of contributions is below. Of course realising opportunity requires investment and I am delighted to be able to tell you that we are making some significant steps forward across our product lines.  Last year, while many companies were cutting back, we actually increased our investment in R&D by 5%.  This commitment is really starting to pay off as we create a virtuous circle: new customers are joining our product communities, in turn they are contributing ideas and best practice which is improving our products even further. MARKET FORUMS Finally, I would like to draw your attention to an exclusive opportunity for our Risk Management customers. This month we kicked off our series of global market forums, with our first taking place in Dubai.  Over the coming three months we will be hosting our customers in India, Thailand, Italy Germany and Spain.  Details are on our website.  The forums bring together some of the biggest names in our business (over 75% of the worlds top 20 banks use Thomson Reuters Risk Management products.) They provide a unique opportunity for customers to come together and discuss what is happening in their markets, providing them with an opportunity to find out how the latest product developments could help them drive a competitive advantage.  I hope you enjoy this interactive magazine - please do let us know your thoughts and I look forward to reading your comments. Best Wishes Mika-John Southworth Global Head of Product Marketing,  Thomson Reuters Risk Management Please click here to return to the  Risk in the Market  homepage http://misys.com/misysblog/2011/q1-2011/risk-management-–-out-and-about.aspx http://misys.com/misysblog/2011/q1-2011/risk-management-–-out-and-about.aspx Tue, 29 March 2011 14:50:00 http://misys.com/misysblog/2011/q1-2011/ksp-and-‘standard’-kondor-instruments-brought-together.aspx Contributor: Franck Rossi, Product Manager Low interest rates and a derivatives market worth $600 billion dollars is creating significant opportunities. Banks prepared to expose themselves to increased levels of risk in exchange for higher returns are showing plenty of appetite. Our 'Openness' initiative responds to this market requirement, and will provide structuring functionality to all standard Kondor+ instruments. Customers are finding new ways to invest as they attempt to increase their current margins. This has caused a shift from proprietary trading to increased levels of sales business, which in turn is driving a demand for new structured products across the globe. We have launched Project 'Openness' in partnership with our high profile Client Advisory Board. The goal is to develop a single platform that significantly improves flexibility, integration and transparency within the trading system. The improved functionality will help banks and traders to differentiate the services they offer their customers. They will be able to do this by designing, trading, and processing customized trades with third party or proprietary analytics; together with all 'standard' Kondor instruments and market data. Flexibility Of course, time to market is essential when trying to maximize small windows of trading profitability. Banks need tools with sufficient speed and flexibility, to enable them to adapt trading instruments to a customer's requirements. By developing 'openness' in Kondor+, we can offer clients a new level of flexibility that permits them to implement any external pricing library. At the same time, Kondor+ new flexibility will allow users to re-use deals as templates. In this way, they can quickly create new and robust instruments that are built on a framework that is already proven. The objective of the 'Openness' project is not to deliver a new structuring tool, but to increase the level of flexibility available for all standard Kondor+ instruments. This will provide a level of functionality that is typically only available with complex structuring tools. Customers will soon be able to modify the payoffs on standard deals. For example, if you have a deposit you can create a dual-currency depository (a combination of a deposit and two FX options). Transparency The demand for innovative financial products continues. This creates a strong drive to increase system flexibility to meet the appetite for these products. However, the increased level of flexibility has a double-edge - it must be combined with an equally high level of transparency in the valuation process. Adequate safeguards are necessary, and, for this reason, visibility and control are key considerations for our 'openness' initiative. The new Kondor+ functionality will provide a level of transparency that will enable full visibility across front-to-back office operations. Integration The incorporation of powerful KSP components (e.g. pricing service, extensibility service, and market data service), within Kondor+ will reduce the number of applications clients use, and provide functionality across multiple systems. For example, the new platform will include the pricing component of KSP in a way that enables clients to use the library both for structured products and their flow business. The benefit is that a client will then only need to integrate and maintain a single library. The new platform will also provide a repository for market data including the new data used within the pricing library. Besides being compatible with all Thomson Reuters components, it will allow customers to integrate the library with third-party systems - thanks to an Application Programming Interface (API). In addition to this, we are developing our market data service. The effects of this will be to extend the market data required by the newly integrated model, but not accommodated within the standard software; as well as helping to centralize this market data. For example, a regional bank with branches in Hong Kong, and headquarters in London will now be able to share all its market data through a central repository. Over the past months, a group of our key clients have formed a working group to develop the functionalities outlined in this post. Please contact Franck Rossi at franck.rossi@thomsonreuters.com if you would like to know more about the project. http://misys.com/misysblog/2011/q1-2011/ksp-and-‘standard’-kondor-instruments-brought-together.aspx http://misys.com/misysblog/2011/q1-2011/ksp-and-‘standard’-kondor-instruments-brought-together.aspx Tue, 28 February 2012 11:05:00 Risk in the Market http://misys.com/misysblog/2010/q4-2010/welcome-to-our-online-discussion,-‘risk-in-the-market’.aspx RISK IN THE MARKET  has been created in response to your feedback at our market forums this year; that you, our clients want more dialogue on what is happening in the market, across Risk's global customer base and with our products.  The current risk landscape can be a blur of information, and glossy hype, so our aim is straightforward: to share insights that are concise, informative and engaging.  This bi-annual online communication is the start, and with your collaboration, we want to grow an online community that will provide valuable information and commentary.  Sharing is the currency of an online community, so we encourage you to join in the discussion, by posting your opinions in the comment boxes on our website. With banks posting positive growth figures during Q2 and stability returning; a lot of Thomson Reuters Risk Management's customers are stepping back and trying to pull together lessons learned and act on them.  This information forms the backbone of our first Risk in the Market newsletter.  We are keen to share with you the trends that are emerging within our areas of expertise, what we see happening both in the market and in other banks around the world. This month in particular Risk in the Market will be looking at: Putting a figure on the potential savings which are offered by system consolidation How to avoid drowning in information - with market data that can talk. Examining what the crisis means to corporate treasury Understanding the challenges posed by data aggregation As well as Risk in the Market's regular features: A customer's story Meet the team I hope you enjoy the articles.  Please let us know if there is anything in particular you want to hear more about in future editions of Risk in the Market. I look forward to reading your comments. Warm Regards Mika-John Southworth Please click here  to return to the  Risk In the Market homepage . http://misys.com/misysblog/2010/q4-2010/welcome-to-our-online-discussion,-‘risk-in-the-market’.aspx http://misys.com/misysblog/2010/q4-2010/welcome-to-our-online-discussion,-‘risk-in-the-market’.aspx Tue, 28 September 2010 15:13:00 Risk in the Market http://misys.com/misysblog/2010/q4-2010/the-corporate-treasurer-plays-a-key-role-in-liquidity-management.aspx The ongoing debate around treasury centralization vs. decentralization has cooled.  Under current funding conditions, the hot topic is unquestionably 'Where is my cash?'    Recent events have placed the corporate treasurer at the heart of key decisions around liquidity management.  Following the crisis there is a highlighted need for expert advice on a range of issues, from day to day cash flow management, to providing insight into critical business decisions.   In the current environment, the main areas of corporate treasury intervention include:   cash flow efficiency (working capital management) and access to liquidity. This is key to ensuring the right amount of cash is in the right place at the right time ( cash pooling , centralization) increased demand for risk management ('what if' scenarios from management) and capital preservation increased demand for bank connectivity through Swift (focus of Sibos 2009) rise of commodity, credit and counterparty risk (volatile prices, company failures, economic downturn) a growing role in investor relations (protect the balance sheet) and tax.  Is there enough cash to fund the company's strategy? Today, putting in place business workflows and systems that enable improved cost of funding and working capital for the company is a fundamental requirement.    There is no magic solution but the pressure is on for treasurers to implement a treasury process that provides a comprehensive view of their cash position at any point of time.  We anticipate  that real "Front to Bank" type organizations will emerge from this situation.  And there is no doubt they will have sophisticated treasury business processes and systems that resemble manufacturing companies in terms of efficiency.    Based in Paris, Yan is Head of KTP Product Management, where he specializes in Corporate Treasury.  He has worked for Thomson Reuters for over 10 years.  During this time, he has covered Switzerland and Austria, and the Nordic and Baltic region - managing sales, presales and operations.  Before Thomson Reuters Yan gained useful experience for his current role, working in both middle and back office Corporate Treasury.   Please comment in the box below or email  yan.dekerland@thomsonreuters.com Click here  to return to the  Risk In the Market  homepage. http://misys.com/misysblog/2010/q4-2010/the-corporate-treasurer-plays-a-key-role-in-liquidity-management.aspx http://misys.com/misysblog/2010/q4-2010/the-corporate-treasurer-plays-a-key-role-in-liquidity-management.aspx Tue, 28 September 2010 15:08:00 Risk in the Market http://misys.com/misysblog/2010/q4-2010/solving-the-challenges-of-data-integration.aspx At last, we are starting to see some positivity, as second quarter results reveal that many organizations are on the rebound.  However, financial institutions are still conscious of the need to reassure their markets, and investors with holistic, and near to real time information.         The last crisis showed that the security of an institution was not linked to its ownership, either public or privately held, but rather, its ability to manage risk profit and loss.  So essentially, it is not a question of ownership, but of strengthening internal culture.  Going forward, it is important that organizations look at ways to address the following:   The way risk and P&L data is consolidated across disparate systems   Banks need to receive data from all divisions and departments, and translate mark to market P&L, and VaR into accounting views.  The problem with P&L and risk data is that it tries to combine two very different views: a mark to market (economic) and an IFRS (accounting) view.  The future lies in a market data and securities master that enables valuation and reconciliation across the bank.    Access to the market for refinancing purposes    The more stable and accurate the risk forecast, based on better risk consolidation, the easier it will be for organizations to come through a crisis.  The predictability of future risk scenarios will enable faster reactions to market movements, and better access to international markets.  Consequently, it will be easier for organizations to get liquidity and  robust funding.    Data accuracy and processing speed    Capital adequacy, risk and liquidity cash flows are calculated from millions of transactions across a bank.  Consolidating data across multiple sources and into the accounting systems is time-consuming.  It can create a delay of up to a month before full reports can be distributed.  Furthermore, when risk information is aggregated for portfolio calculation or asset liability purposes, it has two impacts: firstly, a loss of information in underlying transactions, and secondly reduced financial clarity caused by portfolio assumptions.  As a result, not only does the risk management figure lack teeth, the business itself is compromised by financial figures that fail to reflect real time business events.   How should organizations respond to these challenges?  They need to evolve their infrastructure to combine risk, P&L and cash-flow views into a single reporting and valuation platform.  In order to do this they need to:   develop their technology to enable a view of the whole bank from an asset and liability management perspective, giving access to the underlying transactions and market data.  explain Risk and P&L on an intra day basis from both a capital at risk and a liquidity risk perspective.  This needs to include an economic mark to market perspective, as well as a regulatory or accounting perspective. understand the correlation between volatility of risk parameters, and the volatility of cash-flows in order to determine the real drivers, and impacts on current and future profit and loss.  In summary, successful organizations will each find their own line, as they move forward to tackle the challenges of data integration; evolving the role of reporting away from regulatory compliance to one focused on providing critical business information - and then using this new information to make better strategic decisions.   Contributor: Alexander Dorfmann, Head of Product Development   How are you responding to your organization's need for centralized, closer to real time information?  Please share your views in the comment box. Please click  here  to return to the Risk In the Market homepage. http://misys.com/misysblog/2010/q4-2010/solving-the-challenges-of-data-integration.aspx http://misys.com/misysblog/2010/q4-2010/solving-the-challenges-of-data-integration.aspx Tue, 28 September 2010 15:02:00 Risk in the Market http://misys.com/misysblog/2010/q4-2010/standardization-and-consolidation-for-streamlined-risk-management.aspx Everyone is talking about the way the business world has evolved rapidly over the past couple of years.  One thing is certain the organizations that will thrive are those that develop a more agile, and cost-effective approach to risk management.    Driven by a cut in technology spend, clients are looking across their trading platforms for ways to reduce costs and operate more efficiently. We have been working with these clients, typically large regional banks, to respond to these cost pressures - specifically through the standardization and consolidation of their infrastructure.   Over the past year, a number of our clients have initiated programs to reduce their system footprint to one or two main platforms, as opposed to running three or four.  They all run several of our systems, and they undertook system reviews to compare the Kondor+ Suite directly with equivalent competitor software, on a cost per trade basis.  All their analysis had shown that when they conducted a comparison of the Kondor+ Suite with two of our main competitors (based on cost per trade variation), it cost two to three times more to run rival software than to run Kondor+.  The saving from this cost-reduction exercise is substantial:  a bank with more than 100 users at a cost of running the installation of  seven million Euros per year.  If you multiply the cost of running a competitor system by two or three times this amount, you begin to understand the reasons why these clients chose the Kondor+ Suite for their system standardization.  While standardization certainly makes sense from a cost perspective, it is vital to build a compelling story for end users.  Our team is working closely with these clients to validate the standardization process through demonstrations of our latest versions and improvements, as well as helping to ensure as seamless a transition as possible.   We have also seen the effective use of standardization to downsize and decommission customized in-house application projects.  These projects are now viewed as unaffordable, due to their lengthy duration and high development costs.  We are seeing clients moving to simpler standardized and more cost-effective applications like the standardized Kondor+ Suite platform, as opposed to tool-kit or framework type applications.  By working closely with clients, in each situation we have been able to provide powerful functionality matches.   Consolidation into a single system or a major hub is proving to be an effective way to reduce architectural footprint.  A number of high profile clients have increased efficiencies and reduced resource and maintenance costs by using Kondor+ Suite for system consolidation.  A centralized infrastructure needs to be operational 24/7.  Here, we are working to develop systems that can run globalised positioning and reporting, while at the same time being independent of batch type processes in order to address date changes, time zones, and localized data for trade-specific calculation parameters.   The evidence shows that consolidation and standardization play clear roles within the cost argument.  On one hand, you have the simplification of existing coverage, and, on the other hand, you have the reduction of physical instances of infrastructure.  Both these approaches offer cost-reduction strategies that respond effectively to today's evolving risk management needs.   Contributor:  Michael Henssler, Head of Product Management   How are you responding to cost-reduction pressures in your organization?  Please share your thoughts in the comments section below.   Please click here  to return to the  Risk In the Market  homepage. http://misys.com/misysblog/2010/q4-2010/standardization-and-consolidation-for-streamlined-risk-management.aspx http://misys.com/misysblog/2010/q4-2010/standardization-and-consolidation-for-streamlined-risk-management.aspx Tue, 28 September 2010 14:20:00 Risk in the Market http://misys.com/misysblog/2010/q4-2010/a-complex,-growing-business-benefits-from-a-front-to-back-solution.aspx ING Vysya's existing systems lacked the flexibility and scalability to cope with the demands of their growing derivatives business.  This project was key to ensuring the bank maintained its position as India's leading private sector bank. ING Vysya Bank has retail, private and wholesale banking platforms serving over 1.5 million customers through 521 branches and 355 ATMs.  Combined with ING's global expertise, ING Vysya Bank stands for an entrepreneurial, integrated financial services organization where innovation and transformation are a way of life.  With a history spanning 80 years, it has developed long-standing customer relationships and a deep understanding of the Indian market. All ING Vysya's reconciliations, and complex deals were processed manually, which caused a difference in valuations between the bank's front and back office systems.  They needed to develop and structure new products quickly, to support their derivatives business.  There were three key requirements: valuations that were consistent across front and back office a single system to capture all trades and eliminate operational risk the functionality to create new structured products separately and modify them 'on the fly' ING Vysya wanted a powerful, reliable system that could automate trade processes and provide full straight through processing from deal capture to accounting.  They needed the flexibility to introduce new financial products directly into the trading rooms.  In addition, ING Vysya needed to consolidate its front and back office systems.  Furthermore, they looked for a vendor who had a strong presence in India, and who clearly understood this market. After evaluating several systems, ING Vysya opted for Thomson Reuters Kondor+ Suite.  They had used Kondor+ for front office risk management since 2004 and had an existing relationship with Thomson Reuters.  ING Vysya listed the following reasons for selecting Thomson Reuters for this important project: full front to back STP and automation excellent flexibility, and the functionality to cope with complex financial instruments and speed up time to market adaptability to Indian market needs support from local Thomson Reuters staff who could quickly create new templates for structured products a strong service record and proven delivery capabilities in Asia a commitment to continued product enhancements ING Vysya implemented Kondor+ Suite structured products to structure, price and manage its structured products portfolio.  They increased operational efficiency and reduced risk by replacing multiple back office systems with the award-winning Kondor+ Suite back-office.  This module now manages the bank's entire back office operation.  Together with the existing Kondor+ front office functionality, the two modules allow a complete front to back office application that processes all types of instruments including complex derivatives.  It provides a sophisticated, flexible tool for pricing, trade capture, real-time position keeping and cross-asset risk management. The benefits of integration  Since ING Vysya already used Kondor+, there was a clear benefit to linking existing Kondor+ front office functionality with the structured products and trade processing modules: the bank now had a complete front to back office application.  It had consolidated a full range of trade and risk management tools in real time, across all asset classes and instrument types, onto a single platform.  Kondor+ Suite also provides industry-leading analytics for the front office and flexible, configurable workflow management for the back office.  By using an integrated solution, ING Vysya has avoided incompatibility between front and back office interfaces.  They can develop new structured products easily and price them correctly from a wide range of proven pricing models.  Any new products can then be incorporated seamlessly into existing processes.  The advantages of the integrated Kondor+ Suite include: full straight through processing (STP) implementation within an event- driven, service-oriented architecture full functionality trade processing from deal management to accounting entries customization to accommodate different user requirements reduced administrative support and costs      adaptability to the Indian market         openness and flexibility A platform for growth Thomson Reuters strong relationship with ING Vysya Bank gives them the tools to drive their business strategy.  The combination of Thomson Reuters risk technology and ING Vysya's reputation for effective customer care places them in a position to leverage opportunities and strengthen their market position. "This was a major project, absolutely critical to our business.  We needed an experienced partner who we could trust to deliver.  When we evaluated the choice of solution, it became clear that Thomson Reuters was our preferred supplier - they were ahead of their competitors."   Mr. Lakshmikanthan, Associate VP - senior project manager at ING Vysa  Would you like to add your thoughts to what was said above?  Or ask a follow-on question? Please click  here  to return to the Risk In the Market homepage. http://misys.com/misysblog/2010/q4-2010/a-complex,-growing-business-benefits-from-a-front-to-back-solution.aspx http://misys.com/misysblog/2010/q4-2010/a-complex,-growing-business-benefits-from-a-front-to-back-solution.aspx Tue, 28 September 2010 14:05:00 Risk in the Market http://misys.com/misysblog/2010/q4-2010/liquidity,-the-ultimate-operational-risk.aspx A fundamental principle of risk management is that only diversification can mitigate risk.  A uniform treatment for possible liquidity risks, imposed regardless of the diversity of exposure and investment purposes, will only transfer risk from one area to another, and concentrate it further. Liquidity was the trigger for failures in Tier 1 institutions previously considered 'too large to fail'.  In response to these conditions, and in anticipation of increased regulatory pressure, Philippe Carrel has written the paper 'Implementing a new culture of risk management'. Carrel believes risk management must be re-purposed into a corporate culture.  Confidence will return once risk management sits at the forefront of corporate strategy.  The funding strategy and liquidity tactics of a firm should: affirm its risk structure; evolve with its strategy and ever-changing exposure and risk factors; and reflect constraints from the external world.  Carrel's approach relies on establishing an appropriate risk management culture at all levels of organizational hierarchy, to facilitate clear communications, and a system-wide exchange of information.  Its success depends on a continual exchange of information between firms and regulators, and among regulators, to enable dynamic responses to liquidity issues as they hit.  Carrel discusses three areas that enable us to identify sources of liquidity risk and evaluate their potential impact. Multiple sources of liquidity risk in modern finance Liquidity risk arises from the unexpected - tail risks, internal imbalances, counterparty failures, market crisis, systemic risk or the combined effects of these shocks.  Imbalances occur when market conditions change the value of assets and collateral, or when external factors disrupt funding sources.  The 2007/2008 crises challenged inefficient liquidity tactics, by exposing firms to liquidity risk factors from external sources. As well as the complex mix of asset-liability-collateral factors that apply uniquely to each firm, liquidity risk is widely recognized by the industry as valuation risks resulting from market depth, transparency, and funding risks.  In addition to these endogenous variables, external sources such as counterparty linked, and regulatory driven liquidity risk can affect internal risk factors.  The most valuable lessonin the post-crisis era is that risk can no longer be managed in isolation. Measuring and quantifying liquidity risks Liquidity supply manifests itself differently in each firm, depending on its business, customer base, preferred funding channels and regulatory framework. It is rooted in an organization's DNA.  Therefore, liquidity risks arise from many sources, as the consequence of multiple operational risks and their combined effects.  The white paper outlines how we can measure and quantify liquidity risk, including, valuation-driven liquidity risks, market depth, over-the-counter markets, asset liability risk, systemic sources of liquidity risks, concentration risks and regulatory risk. Managing and mitigating liquidity risk Today's liquidity risk prevention strategies must be agile enough to survive the unexpected.  We need to replace old model-based systems of liquidity risk management with a new framework.  Here, the gaps and key sensitivities a firm exposes itself to, should be systematically mirrored through its funding tactics and liquidity strategies.  This conceptual shift comes from a focus on agility, responsiveness, adaptability, and the progressive development of a risk management culture.  A framework for liquidity management that fits the specific corporate risk policies of each firm should include three key elements: these are tracking, and monitoring risk concentrations; keeping a focus on valuations, and measures of sensitivity; and asset liability management (ALM). Adapting funding strategies and liquidity tactics to a risk profile requires constantly maintaining a balance between these three poles. Managing liquidity risks involves raising awareness; understanding and monitoring exposure; analyzing risk concentrations inside the company; and outside with the rest of the market.  A firm must benchmark its exposure concentrations.  It can then develop alternative courses of action, and communicate the process internally and externally, to unite risk policy and consensus agreements.Moreover, this whole framework, including the IT architecture should enable corporate governance, rather than replace it. Philippe Carrel executive vice president and global head of business development at Thomson Reuters Risk Management writes prolifically on the subject of risk.  He has recently published his book, 'The Handbook of Risk Management: Implementing a Post-Crisis Corporate Culture'.  Please follow the  link  to Phillippe Carrel's paper 'Implementing a new culture of risk management' to see more on this topic. Please click  here  to return to the Risk In the Market homepage.   http://misys.com/misysblog/2010/q4-2010/liquidity,-the-ultimate-operational-risk.aspx http://misys.com/misysblog/2010/q4-2010/liquidity,-the-ultimate-operational-risk.aspx Tue, 28 September 2010 10:31:00 Risk in the Market http://misys.com/misysblog/2010/q4-2010/better-counterparty-risk-how-can-we-make-our-data-talk.aspx The dramatic collapse of firms like Lehman's highlighted the need for more effective risk control.  The real value in risk management is the insight it can provide to facilitate better business decisions. The challenge is pinpointing the valuable information that exists at a granular level.     Before the financial crisis, banks produced figures for calculating their value at risk, and potential losses on trading activity, in relative isolation.  Today they face a constant challenge: as trading increases, so does the number of counterparty transactions.  This means a risk office may need to manage billions of computations on a daily basis.  Assume you need one  second to validate each figure, imagine how much time is required to check each of a billion computations (the answer is 30 years); there is simply not enough time in a day for you to do this. So at the end of the day, most banks can only check a small part of their activity - usually just a few hundreds figures.  As the situation intensifies, the whole industry has had to step back to examine whether this approach provides an effective assessment of a businesses' true risk.  The consensus seems to be that it does not. Many people believe that there is often little correlation between risk figures, risk compliance, and understanding that risk.  When all the focus is on processing figures, with limited capacity for analysis, how can you correctly assess your risk? While banks may comply with regulatory requirements, in reality they may have little control over their real risk.     If only the data could talk.  The most valuable insights can be found at the most granular level of data, and successful risk managers will be those who can access this information. Traditionally, risk decisions have been made, using the analysis from large amounts of aggregated data.  The problem with typical data aggregation is that there is limited opportunity to drill down into the detail for checking and further analysis. The number at the top of the pyramid is often based on assumptions that are inaccurate.  We need to move away from traditional processing behaviour, allowing risk managers to spend less time computing figures, and more time adding real value through analysis.  The challenge is how to invert the pyramid to release the most valuable information, without overwhelming risk managers with unworkable quantities of data.  The only way forward is to develop more intuitive tools, which can clearly communicate potential risk areas, and then convert this information to risk transparency.  Our approach has always been to help clients focus on thoroughly understanding their risk. We are constantly developing functionality that provides better analysis of data at a micro level, and, therefore, better visibility. If you can identify risk and establish the causes, you have a better chance of understanding that risk, and you will be better positioned to manage it.  Consequently you can be far more effective at identifying opportunities to increase profitability by reducing exposures that go beyond your risk appetite.   In summary better counterparty risk is not only about regulatory compliance or preventing another Lehman's.  It is about looking beyond aggregated figures, to produce insights that support better business decision-making.  Please share your thoughts on increasing risk transparency or contact Thierry Truche at  thierry.truche@thomsonreuters.com    Click  here  to return to the Risk In the Market homepage.   http://misys.com/misysblog/2010/q4-2010/better-counterparty-risk-how-can-we-make-our-data-talk.aspx http://misys.com/misysblog/2010/q4-2010/better-counterparty-risk-how-can-we-make-our-data-talk.aspx Mon, 27 September 2010 10:28:00