Kevin Samborn, cto, NumeriX, dispels advice on how to get the most of your data analytical software package and how to select the best solution for your firm.
Q: First of all, what does pricing and risk analytics software do, and why is the use of pricing analytical software essential in today’s market?
Pricing and analytics software is a computer implementation of the sophisticated mathematical algorithms necessary to value hard-to-price and illiquid derivatives and structured products. In fact, computer models form an intrinsic part of the best practices of valuation. This is essential in today’s market because clients, regulators and auditors demand consistent and transparent policies for the origin of valuations.
With the current drive for transparency, all financial institutions, including sell-side brokerages, large and small banks, money managers and hedge funds (and their counterparties) must look outside to select a reputable and independent software vendor to provide these models.
Q: How is pricing analytical software best be used? What are the best practices firms should adopt when using analytical software solutions?
Many of our clients are in the process of developing and implementing enterprise-wide pricing policies to instill consistency and transparency into the pricing process. We at NumeriX refer to this as ASTP-Analytic Straight Through Processing.
To achieve ASTP, an institution should abide by the following: a) independent models and software solutions need to be used consistently throughout the front-to-back office; b) market data and other inputs that are fed into the model must be well-defined; c) the individual instruments should be captured. Fund managers who outsource operational functions will need to review the way in which the vendor or service provider is actually coming up with the prices, in addition to what software solutions are being used, and how. The end result is a consistent and repeatable valuation process.
Q: What should a fund manager keep in mind when selecting analytical software?
It is very important for any analytical software system to be able to support new instruments. Technically speaking, the package should be able to represent financial instruments using data-driven technology. This means that the package should be able to price different products solely through a description of a security without having to write new code to support new products. For example, if new features such as embedded caps or floors become popular, it is critical to be able to provide pricing support without having to wait for the vendor to deliver a new software upgrade.
Again, the system should also be flexible in its usability so different departments, such as the front office and risk management team can all use the same software-but for their own purposes. Naturally, different departments use software differently. In the front office, Microsoft Excel is still very popular, while in the middle and back office, a full database system is the standard. It is critical that a chosen analytics vendor offers the same technology with different interfaces to appeal to the different departments. These interfaces include the above mentioned Excel, a database system, software developers kits-and also pre-built "plug-in" modules for third-party system vendors.
Finally, it is crucial that the software system is independent and available from the vendor itself-and not just from a financial institution. This is important in order to ensure the software is truly transparent, without the influence of a particular institution’s market-making intent. In addition, it provides the combined benefit of cost savings and industry-wide knowledge sharing through economies of scale.
* For more information on NumeriX please refer to www.numerix.com
