Technology vendor rankings 2011: The results

The focus on risk, particularly the counterparty credit risk, along with performance challenges and the need for transparency and continued innovation are all highlighted in the second annual Structured Products technology survey. Clive Davidson talks to technology providers about their solutions and offers an analysis of what the merger of Misys and Sophis means for the broader market. Research was provided by Ana Mendes and Beatrice Leedell

Innovation is back in the structured products market - and complexity never completely went away. So say the technology vendors that serve the market and who must keep their software in line with the requirements of its participants. However, the innovation is happening in new areas - in underlyings rather than payout structures, in those areas that were slower off the mark to create structures such as forex and commodities, and in fund-based products. And the complexity is in the portfolios of products created before the financial crisis and the flight to vanilla products - portfolios which cannot just be wished away, but must be even more accurately valued and carefully managed.

Meanwhile, regulators have been stepping up their demands, particularly in the area of capital to cover counterparty credit risk, resulting in the need to calculate credit value adjustments (CVAs) on trades. This can be complex and computationally demanding, especially if performed pre-trade, and therefore requires sophisticated analytics and a high-performance processing environment.

It is in this environment, where software vendors have been stepping forward with new technologies to help their clients meet these challenges, that the 2011 Structured Products technology vendor rankings have taken place. The results, which you can read here, are our readers' verdict on which technology vendors best helped market participants achieve their business goals.

This year's winners are mostly familiar names, although there was significant movement in the individual placings, demonstrating that this is not a market where vendors can rest on their laurels.

Murex on top

GPUs make it possible to manage [books of complex products] in quasi real time, instead of once or twice a day, and allow enough Monte Carlo simulations [to take place] to get smooth gamma for better risk management

Overall winner was Paris-based front-to-back-office system vendor Murex. The company dominated the trading system section and appeared in the top five in half the pricing and analytics categories, as well as in the credit risk management, limits and collateral management categories. Just pipped into second place was New York-based Numerix, which featured strongly in all the pricing and analytics categories and won both the market and credit risk categories. Third was Pennsylvania-based SunGard, which was placed across more categories than any other vendor, demonstrating the breadth of its product suite, just beating off Paris-based Pricing Partners, which won all but the equities category in the pricing and analytics section.

 

 

 

 

 

Meanwhile, last year's winner, London-based Misys, slumped from first to seventh place overall. However, this situation could well turn around in the coming year following the firm's recent acquisition of Sophis, the Paris-based front to back office system vendor. Sophis shared fifth place overall with Toronto-based Algorithmics - the highest ranking of the dedicated risk management vendors.

For Murex, the past year has seen a continuation of trends that have been in place since the financial crisis, says group chief executive Maroun Edde. While there is an ongoing move towards less complex products, there is still a demand for new structures. But time to market is critical. Developers need to be able to create new products quickly, and with minimal programming. Here, Murex clients have benefited from the company's recently introduced scripting language that enables them to create structures by describing the payout only, while the system automatically generates contract events, confirmations, settlements, and so on. In addition, Murex's technology enables developers to rapidly bring new structures into a production environment that provides accurate and timely pricing, hedging, risk management, collateral management and back-office processing - something that is an "absolute necessity" in today's risk-focused market, says Edde.

Another major trend is the need for "a massive acceleration in calculations", says Edde. Clients want fast and accurate pricing and calculation of risk sensitivities such as credit Value-at-Risk. In response, Murex has invested heavily in porting its pricing and risk code to high-performance computing environments, including graphical processing units (GPUs) - lightning-fast parallel-processing microprocessors originally designed for computer graphics, but well suited to financial computation because many of the calculations, like graphics, are also essentially parallel in nature. The use of GPUs has led to calculation speed increases of between 60 and 300 times, "making it possible to manage [books of complex products] in quasi real time, instead of once or twice a day, and allowing enough Monte Carlo simulations [to take place] to get smooth gamma for better risk management," says Edde.

Second-placed Numerix has also been adapting its code to take advantage of new parallel processing environments. Like Murex, it has been porting its pricing and risk analytics to GPUs, as well as extending its support for distributed grid computing and Microsoft's High Performance Computing Server 2008 environment.

One of the driving forces behind the move to high performance computing environments is the increased focus on risk, especially counterparty credit risk. The Basel 2.5 regulations, for example, require banks to take into account the incremental counterparty credit risk of each trade through the calculation of a credit value adjustment. This presents a significant challenge. "To do CVA right, you need to look at an entire portfolio before a trade is made and see how the new trade affects the exposure profile for that counterparty," says Satyam Kancharla, senior vice-president, client solutions group, at Numerix. "You have to look at latest credit rating or curves for the counterparty and see what the CVA will be. And because this is a trading and not a middle office issue, it must be done in real time."

Numerix has introduced a new module for CVA calculations. Meanwhile, the increased focus on risk has led the company to move towards what it calls exposure-centric analytics. "This means not just pricing, but calculating the entire exposure profile for an asset," says Kancharla. And for portfolios, it means aggregating the exposures across all asset classes. "This requires a modelling framework than can accurately express all of the risk factors across forex, interest rates, inflation, commodities, etc.," he says. Numerix' hybrid model framework, which provides consistent modelling across asset classes and risk factors, meets this requirement, says Kancharla.

In addition to the activity around CVA, Numerix has been active in supporting clients in the commodities and inflation markets, where there has been a surge of innovation in structured products, and in insurance, where the market for variable annuities continues to grow, says James Jockle, senior vice president, marketing, at Numerix. Insurance is another sector where the Numerix hybrid model framework is serving the company well. Insurers require consistent valuation and analytical capabilities not only for pricing and structuring variable annuity products, but also for measuring value-at-risk and other risk factors, as well as for asset and liability management, says Jockle.

Third-placed SunGard agrees with Murex on the importance of time to market, and adds that transparency has been one of the other key issues in the structured products market over the past year.

"Mishandling and misunderstanding of complex structured products was of course at the heart of the financial crisis," says Krzysztof Rojek, head of pre-sales for SunGard's Front Arena. "Yet narrowing profit margins in flow trading means that there is a continued drive towards creating and maintaining high-margin structured products business lines." So despite the crisis and the focus on risk, innovation is alive and well, particularly across Europe and Asia where SunGard has seen a number of new desks being set up over the past 12 months to trade bespoke complex derivatives.

This leads to what Rojek calls the critical challenges of transparency and time-to-market. "Adding new structured product types can be a costly and lengthy process, with stricter internal approval processes and the potential for higher operational costs. There are tighter controls on the pricing, analysis and management of these products, driving a need for greater technology support," he says. SunGard has been able to succeed in this market because it marries sophisticated risk management capabilities to comprehensive product coverage, claims Rojek. "The architecture of [SunGard systems] like Front Arena allows customers to take full ownership and control of complex and structured products and their risks, with greater accuracy in pricing," he says.

Fourth-placed Pricing Partners has also noted the market's demand for greater transparency. To this end, the company now offers a source code version of its Price-It pricing libraries. Traditionally, when users buy software they get the functionality - in this case, the ability to price financial instruments - but cannot see the computer code underneath that carries out the actual tasks. Pricing Partners source code version takes the lid off the code and allows clients to inspect all the workings of the models and their assumptions, and - perhaps more importantly - integrate, change and evolve the code themselves without the involvement of Pricing Partners. Among the first clients to take advantage of this is Korea's Daewoo Securities, which has acquired the open source version precisely for its transparency and the easy integration of the pricing libraries into Daewoo's IT infrastructure, says Eric Benhamou, chief executive of Pricing Partners.

In addition to the source code version of Price-It, Pricing Partners now offers real-time access to its Price-It Online valuation service. This enables clients to inspect and alter the data and assumptions used in the service's valuations. "Users can change the market data and see the impact on valuations for stress testing or other purposes," says Benhamou. "We want to provide full transparency and give our clients the same tools they would have if they were in the trading room of a big bank," he says. One of the advantages of the ability to alter data and assumptions is that it can enable firms to reconcile their pricing of structured products with those provided by banks - a purpose to which France's OFI Asset Management is putting the service, says Benhamou.

The drive towards greater transparency has not been at the expense of innovation. "Innovation is back - but in the underlyings rather than the pay-offs of structured products," says Benhamou. Overall, the market continues to move towards less complex products, but with innovation in the underlyings that are used to make up the structures. "If clients want returns they need to go to new markets such as Asia for the underlyings," he says.

Meanwhile, many institutions still hold large portfolios of complex structured products built up pre-crisis that they must still manage through to maturity, says Benhamou. Here the need is for accuracy and the ability to handle complexity, hence the continuing need for software from companies like Pricing Partners.

Algorithmics, which came joint fifth, topped the collateral management category and was placed in the top five in all the other risk management-related categories - market and credit risk and limits. The firm reports that CVA has also been a major challenge for its clients, with the capital charges driving them towards scenario-based calculations, with all the complexity and computational challenges that implies.

"Our clients have found that CVA charges based on simplistic add-on methods are very punitive for structured products and they are moving toward real-time, incremental counterparty level measures of CVA based on full Monte Carlo simulation," says Richard Black, vice-president, financial engineering, at Algorithmics. "Clearly, this posits significant challenges ranging from coverage - ensuring that the CVA system handles a wide range of structured products in a way that is consistent with front-office pricing - through to performance." Algorithmics claims to help clients on both counts, with support for a wide range of structured product types built into its system and tools to easily create and integrate new structures, as well as a number of performance enhancements. "We have developed numerous techniques for speeding up calculations and these techniques work with a client's own set of structured products that have been added to the system," says Black. Among these speed-up measures is support for high-dimension Sobol sequences, a quasi Monte Carlo technique, for product valuation and calculating CVAs and CVA sensitivities. "Our testing indicates that this alone offers a five- to10-times performance improvement," says Black.

The Sophis-Misys merger

The fortunes of London-based Misys and Paris-based Sophis in the Structured Products technology vendor rankings over the past few years mirrors the volatility of the financial markets themselves. Sophis was first overall in the inaugural Structured Products rankings in 2009, falling back to seventh in 2010, and rising back up to joint fifth this year. Meanwhile, Misys was fourth overall in 2009, shot up to first in 2010, and has dropped back to seventh this year. However, this could all change now as Misys acquired Sophis on March 1, and has begun to integrate the two company's product lines, which could bring a greater consistency to their placing in the rankings.

The rationale for the acquisition and merger is the complementary strengths of Misys and Sophis, the companies claim. Their results in this year's rankings bear out these claims (Misys and Sophis were still independent companies at the time of voting for our rankings and we have therefore listed them separately across all categories) - Sophis topped the equities pricing and analytics and trading system categories, while Misys topped the interest rate trading system category and came joint third in the credit trading systems category. (Also, Sophis has a large market share on the buy-side with its Value front to back office system where Misys has little presence, while Misys has a strong sell side presence with its Must structured products module.)

Misys Sophis, as the new merged entity is now called, points to another area of innovation over the past year - fund-based structured products, including leveraged exchange-traded funds (ETFs), short ETFs, formula-based funds such as those based on constant proportion portfolio insurance (CPPI) and volatility targets, and structured products based on underlying funds such as mutual fund capital guarantees. Ensuring accurate and timely measurement and management of risk across these and other structured products, with advanced stress testing and profit and loss explanation, has been a major challenge for firms, says Jean-Baptiste Gaudemet, product manager, investment banking, Misys Sophis.

To help its client meet these challenges, Misys Sophis recently introduced modules for ETFs and ETF derivatives and CPPI and CPPI derivatives funds. A client that has implemented these capabilities is Robeco, the asset management subsidiary of Rabobank. Misys Sophis also added support for potential future exposure calculations for credit risk management, and is currently working on support for CVA and other credit risk measures. Its high performance grid computing capabilities have also been important in its success in the structured products market, says Gaudemet.

California-based Calypso Technology, which topped the credit trading system category, came joint eight overall in this year's rankings along with New York based Thomson Reuters. Both companies offer a suite of front to back office products. Joint tenth place was shared by New York-based online pricing, trading and risk management technology vendor Bloomberg, and Tel Aviv-based Modelity Technologies, which won the client interface and e-commerce platform category.

None of the market factors that this year's technology vendor ranking winners have highlighted - the focus on risk and particularly on counterparty credit risk, the need for transparency, the performance challenges, and the continued innovation under different guises - are likely to go away over the next 12 months.

A PDF of the rankings in all categories is available here