Overview of Derivatives Technology

International Swaps and Derivatives Association

June 20,2000.
Presented by
Scott Dillman & Ian Drachman
scott.dillrnan@us.pwcglobal.corn& ian.drachrnan@us.pwcglobal.corn
a a
Agenda

Agenda

Derivatives Technology: Considerations and Concerns

The Derivatives Technology Environment TODAY

The Vendor Selection Process

Conclusion
 Considerations and Concerns

Consider all the factors to influence the decision

Effective systems must be in place to address and control
increasing sophistication, diversity and risk in the financial
markets
Volumes
Product Sophisticated
complexity Risk Methods

Management Pre;;;rrS;n,"m~<PI
r----> Globalization
Requirements

Product
Emerging
Evolution
Technologies Regulatory
Requirements
 Considerations and Concerns

Drivers to identify the right solution

There are a number of key considerations that derivative systems

must address

Completeness
Flexibility Consistency and
Standardization

1 )
Strong Control
Environment < Scalability,
Robustness

Reusability Reliability
Performance
L
 Considerations and Concerns

And even more considerations and concerns.. .

Flexible processing

Data architecture Integration

Sync
>I
processing
cycles
Technology
Considerations
Streamlining
administration

Document Architecture
Management
Business Architecture
-7
 Considerations and Concerns - Risk Management

What are the risks to be addressed?

 Considerations and Concerns
Identify functionality required versus vendor solution offerings

wm
Marketing Workstation

0
Marketing

Credit
(MIS

Approval Requests

C u r l Facility.
\
Portfolio
Mgmt -< Global Credit Risk Aggregation

Risk rating, SIC, etc.

Risk Workstation
- Credit Approvals Approval credit ~ i ~ k

-
K ~aci"L-

- Limit Monitoring
- Portfolio Mgmt
F
L
n
- redit Requests

Facility#, Lirnils 6 Availabllily

Legal
Agreements
Legal Workstation
- Netting Agreements Back
Office
Interface

Operations ~orkstatiodT Prodllnstrurnenl - MM Risk Requesls(what if)

-Account Opening CustornerlAcd
-Reconciliation
Market Risk. %n rimits and Availability

Risk I MIS - Calc &

Standards - Monitoring G I O ~Market
~ I Risk Aggregation

Front Office ~orkstatiob 1 1

 a
Considerations and Concerns

With all the considerations and concerns, how does one decide
whether to choose a vendor solution or build a system to manage
their derivatives business???
 Considerations and Concerns

i
~ h e " ~ e n dversus
or Build Decision

Advantages to Vendor software Disadvantages to Buying

Lower Cost w Reliance on vendors @ @$!+I# d

Faster implementation Limited in-house experience
Proven and tested Multiple systems
Higher success rate Difficult to Customise
Integration with other in-house
systems more difficult
Proliferation of data, more
reconciliation
 Considerations and Concerns

Buy, Build or Rent - the ASP solution

An Application Service Provider (ASP) deploys, hosts and manages
access to a packa ed application(s) from multi le parties from a centrally
B P
managed facility. ypically, applications are de ivered over networks on a
subscription basis.
Advantaaes:
Speeds implementation
w Rent/lease software
Minimizes startup expenses and duration
w Minimizes risks incurred across the application life cycle
w Overcomes the chronic shortage of qualified technical support personnel
available in-house
Disadvantaaes:
w Less control over introducing changes to production environment
Reliance on vendor for day-to-day production support (SLA) ~ 4 74
4
Connectivity to ASP could introduce other issues (security, performance)
Global implementation(s) may not be possible @ Hvp,
s4L
u'"W&
3-*
 Considerations and Concerns

Variations of the ASP Environment

Single Vendor ASPs:

- Algorithmics
- SunGard

Multi-Vendor ASPs

Consortiurns -M-&...L-"~
 a a,
Considerations and Concerns

Keys to Success

Sponsorship and Ownership

 a e
Considerations and Concerns

Business Sponsors & Users

Market Risk Managers

Credit Risk Managers
Business Product Heads
Business Unit Controllers
Operations
Relationship Managers
Sales & Traders
Legal
Compliance
Auditors
Regulatory reporting
a a
Considerations and Concerns - Integration

Required:

Integrate Front, Middle and Back Office Systems, Personnel

and Infrastructure to avoid:

Constraining Growth

Increasing Operational Risks

Regulator Pressure
 Considerations and Concerns

With all the considerations and concerns, and all the

different systems to choose from, how does one
decide which system to implement ???
 Derivatives Technology TODAY

Derivatives Technology TODAY

Enterprise wide

Market Risk Management

Credit Risk Management

Product Specific

Plug & Play Calculators and Add-ons

I , . . ?\yyt~
Q.&tf.i ,*o JO~M&BZ~\W.
~'~
 a , '

Derivatives Technology JODA Y

Enterprise-wide risk management

2 Algorithmics

3 ATSM
zAxiom RiskMonitor
2 SunGard - Infinity
MKI (C*ATS)
2 Barra Software
,
-
ex
>
a a a
Derivatives Technology TODAY

Derivative trading and risk management

3 Algorithmics lntermark (Focus)

~ s k a rRisk
i Book MKI Risk (C*ATS)
3 ATSM Tradix MKI Risk Vision
3 Axiom RiskMonitor 3 Murex
Brady Trinity 3 OPlCs
FNX Sierra 3 Principia
3 Sungard Infinity 7 Barra
Sungard Panorama Reuters Kondor+/KVAR+/Kredit
GE Technologies - RXM 3 Savvysoft Tops
Summit Systems
*w m
 a @
Derivatives ~ e c h n o l o TODAY
~~t

Product Specific

zAnvil
zFEA
Intermark Focus
zThe Beast (CastleNet)
FENICS
zInventure
zLombard Risk Systems
zSophis
3 Tech Hackers Inc.
 Derivatives Technology TODAY

Calculators and Add-ons

= Adfin
a FEA
3 Mathworks

3 NumeriX
~u&-Ci
 a
Vendor Selection Process

Avoid the 5 pitfalls of the vendor selection process

-
The one person decision My way or the highway
Bells, whistles and toys - Fancy GUI
The one discipline approach - operations only
Too heavily weighting functionality
The short term decision
I Vendor Selection Process
!

I
I Project Management Methodology
1 Major Steps of System Requirements Analysis

Requirements Solution
Requirements Alternatives

Product
Evaluation

Major Steps of Product Evaluation

Application Technology Assess Assess

Product Vendor
Product Product Vendor Product Product
Evaluation Proposals
Requirements Requirements

Develop and Implement "Fast Track1'Solutions

re?,
'201
a
~ ~ I C E W A ~ R H O U ~ ~ P E R ~
 ru c
fd-4 ~"&kr~.
C& Derivatives Technology Today
Identify fun&tionality required versus vendor solution offerings

wm
Marketing Workstation

Risk Workstation
- Credit Approvals
- Limit Monitoring
- Portfolio Mgmt

Legal Workstation
- Netting Agreements
- Margining Agreements

Operations ~orkstatiod
Account Opening
- Reconciliation

Front Office ~ o r k s t a t i o m
 Vendor Selection Process

Project Management Methodology

F)DF)F)F)
Major Steps of System Requirements Analysis

Requirements Requirements Alternatives Solution

Product
Evaluation

/ Major Steps of Product Evaluation

Application Technology Assess Assess Recommend

Product Vendor
Product Product Vendor Product Product
Evaluation Proposals
Requirements Requirements

Develop and Implement "Fast Track" Solutions

 Vendor Selection Process

Step 1 : Plan Product Evaluation

Identify Procurement Approach

Define Evaluation Approach
Develop Process Scenarios
Prepare for Product Evaluation Workshop(s)

A
Review third party content Bob's Guide, Wall Street Technology,
Derivatives Strategy, Risk anagement Technology)
- 1 n + ~ i ~CU~C-W& 0%-
- Ben+ Or&-
- c'nw3- b & ~ \ c ~ -

Request
Application Technology Assess Assess
Product Vendor
Product Product Vendor Product Product
Proposals
Requirements
 Vendor Selection Process

Step 2 : ldentify Application Product

Requirements
ldentify Application Product Evaluation Criteria
Rank Application Product Requirements

Product
Product Product Product Product
Proposals
Requirements
 Vendor Selection Process

Step 3 : Identify Technology Product

Requirements
Identify Technology Product Evaluation Criteria
Rank Technology Product Requirements

Application Technology
Product Vendor
Product Product Vendor Product Product
Evaluation Proposals
Requirements Requirements
 Vendor Selection Process

Step 4 : Request Vendor Proposals

w Prepare Procurement Terms and Conditions

w Prepare Request for Proposal (RFP)
w Contact Vendors

Application Technology Assess Assess

Product Vendor
Product Product Vendor Product Product
Proposals
Requirements
 Vendor Selection Process

Critical RFP Categories

Vendor Corporate Background Information and support structure g+eA 5Me3,aP5 ~ ~

Technical platform and architecture (plug-n-play capability)
Developmental facility
Interfaces to other systems
User Interface
Implementation Approach

System performance, reliability, scalability, throughput (volume)

Position keeping, transaction processing

Product Coverage
Valuation

Analytics
Value-at-Risk

Product SupportTTraining'
Cost
 Vendor Selection Process

Step 5 : Assess Vendors

Assess Vendors' Understanding of Requirements

Confirm Vendorsy-ProductPlans
Assess Vendor Capabilities
w Seek Vendor References

Request
Application Technology Assess Assess
Product Vendor
Product Product Vendor Product Product
Proposals
Requirements
 Vendor Selection Process

Step 6 : Assess Products

Assess Fit to Requirements

Attend and Evaluate Selection Workshops
Define Implementation Solutions

Product Product Proposals Product Product

Requirements
Test Results Vendor selection Process

Specific Test Trade Results

The following 13 trades were selected as the test trades for Infinity and Summit.
The project team was of the opinion that the following trades were representative
of the more complex trade types of the client's derivatives book. The following
trades incorporated five different currencies : CAD, DKK. HKD, JPY and USD.
 Vendor Selection Process

PrimMtizationand Scoring of Critical RFP Categories

The raw score (in bold on the ten) for categories rvlth multiple sub-items represents the average of all its
sub-parls. The number on the right is weighted by importance by multiplying by 13 foicategorpvl dorm to
1 for calqlOrpvl3.
- . .
5- excellent 4- q w d 3- fair 2- lnsutficlent 1- comotetelv misstna
Prloritized Categories
1. Position Keeping1transaction processing
rate resels/payments
audit trail
confirmation tracking
transaction events

. straight-thm-processing
a m u n t Slructure
2. Product Coverage

..
3. Valuation
as-of ability
PBL
reports
flexibility (overrides! formula based)
curve generation
available models! calibration

..
4. Vendor Profile
product direction

. client satisfaction
long range viability
vendor resources
5
4
5
4
5. Technical PlatformlStructure 1 4.25 38 1 4.75 43
operating system 5 5
database 5 5
unitary platform 3 4
data feeds 4 5
6. Development facility 5 40 3 24
(APlIaccess to dass libraries)
7. User interface 4.5 32 4.5 32
I flexibility
ease of navigation
14
5 4
I
8. Analytlcs 4 24 4 24
9. System Performance 5 25 5 25
10. Product SuppoN Training 4 16 4 16
11. Implementation Approach 4 12 4 12
12. Cost 3 6 4 8
13. Valueat-Risk 5 5 5 5
Total 53.6 369 55.45 387
 Vendor Selection Process

Step 7 : Recommend Product

w Consolidate Evaluation
w Review and Agree Procurement Terms and Conditions
w Prepare and Document Recommendation
w Catalogue Vendor Documentation

Application Technology
Product Vendor
Product Product Vendor Product Product
valuation Requirements Requirements
Proposals
 Conclusion

Conclusion

Derivatives Technology: Considerations and Concerns

w
Overwhelming number of considerations

The Derivatives Technology Environment TODAY

w
-
@ I i
Enterprise wide, risk management, product specific and calculators
Forever changing... changing... changing

The Vendor Selection Process

Disciplined approach to selecting a vendor package will ensure a
higher success rate