DerivSource’s Julia Schieffer talks to new entrants and others about the trends fueling innovation today including use of cloud-based technology, pay as you go pricing models and visualisation tools.
As the derivatives market transforms itself to fit with the confines of new regulation and infrastructure, services and software vendors are looking to innovative technology such as cloud computing. It has been a growing presence on the horizon for some time as a cost effective tool and the field is getting crowded with new entrants and solutions.
One such newcomer is CloudMargin who offers a cloud-based collateral management solution to mid-tier firms and buy-side institutions. The reliance cloud technology, combined with a pared down functionality, means this solution costs a fraction of what other off-the-self collateral management solutions charge, said Andy Davies, co-founder and CEO of CloudMargin.
“By being very focused on what the buy side really needs, we were able to get the product at a price point that works for them,” said Davies.
The company supports the full collateral management lifecycle including issuing and responding to margin calls, dispute management, inventory management and reporting however, the solution does not include the more sophisticated tools, such as collateral trading, that a client clearing provider or Futures Commission Merchants (FCMs) would require. End users include asset managers, who do not require the same sophisticated tools as their sell-side counterparts.
“The entry point for CloudMargin is £15K per year and that is all of the costs included, so no extra hosting charges or support costs,” said Davies. Recent research by CloudMargin found that for one potential client the cost for CloudMargin would be £18K per annum for CloudMargin compared to about £300K for another off the shelf collateral management system, he added.
There are clear cost related advantages with the use of cloud-based technology, but the cost savings are ‘highly situation’, observes Bill Fearnley Jr, senior analyst, Securities and Investments at Celent.
He said: “A big motivation [behind use of cloud technology] is scalability so if you require additional capability for capacity to deal with the spikes in volumes for instance, your cloud provider can provide that. Especially for smaller firms, they can get up to speed faster with a cloud implementation rather than building it themselves.”
The movement is only expected grow although security concerns still loom.
“As mobility gets to be a bigger and bigger part of financial services, more and more is going to the cloud,” said Fearnley. Most of the movement is on a project by project basis. However, security is always going to be an issue. Financial institutions will not put everything on the cloud because of the latency availability, lack of ability to tweak or customise data and infrastructure and security concerns. However, security is improving in the cloud. Firms are already deploying private cloud on their own infrastructure or conducing their own monitoring.
Davies believes that “security concerns are alleviated for all of the firms that are putting the data out there into the cloud because we can demonstrate the security policy is very strict. Our infrastructure provider is ISO 27001 accredited, the data we store is heavily encrypted and there are other controls in place so it is far more secure than if it were held internally,” he added.
Use of cloud technology isn’t just for new entrants – established software and service providers are also utilising cloud for existing solutions. For example,
SuperDerivatives, a market data, trading and analytics solution provider that pioneered the use of cloud-based technology in 2000, employs the technology to support suite of solutions, including DCX, its electronic trading platform for FX derivatives.
SuperDerivatives’ DCX is hosted on a secure cloud and offers a web-based GUI, which is easily accessible for clients because they do not have to build an application programming interface API to access the platform and start trading, which reduces connectivity costs, said Zohar Hod, Global Head of Sales and Support at SuperDerivatives.
“We think this is why we have a lot more liquidity – because people don’t have to spend on infrastructure to connect or to build an API between one trading system and a SEF,” said Hod.
Some financial institutions may use cloud but it is still a developing space.
“I think the adoption of the cloud is still in its infancy although it has gone a long way in the last couple of years….” said Hod.” I believe everything will go to the cloud and that security is getting better, as is communication and robustness, and it is extremely fast.”
Duco’s hosted matching service, Duco Cube, harnesses artificial intelligence to match data in different formats without reconfiguring, explains Christian Nentwich, CEO, Duco.
Typically both sell side and buy-side firms struggle to reconcile data because of variations in data quality, formats used and other factors, which makes the reconciliation process for various functions complicated, operationally intensive and costly. With Duco Cube, we’ve employed new types of algorithms and intelligence which can reconcile data despite variations in data type, data quality, and formats used, helping firms control costs and reduce the resources required, said Nentwich.
“The world has changed quite a lot in terms of what is possible. Computer architecture, the availability of virtualisation and the amount of RAM available now means that you can do things very differently and start from scratch,” said Nentwich.
Duco Cube can be applied broadly to various processes where reconciliation of data is required; a trend that other vendors are following suit to support the movement away from product silos.
Nentwich said: “Historically, firms have put in bilateral solutions to support specific requirements, for example to support EMIR or Dodd Frank or for credit derivatives reconciliation, but this has led to a proliferation of a multitude of systems. What we are saying is that you can get much more efficiency if you put something in place if you can deal with everything generically.”
With boundaries between typically separate business lines merging, such as cleared and uncleared workflow, more vendors such as SuperDerivatives are adapting solutions to support a broader reach.
The demand will only increase with the move to central counterparty (CCP) clearing as firms will need to combine OTC valuations with CCP settlement prices. This means, a buy-side firm for instance, will have to gather the settlement prices from different clearinghouses as well as compare and reconcile them with the valuations given by their counterparties.
To complete this process firms need connectivity to gather the prices and functionality to compare them. SuperDerivatives has enhanced eValueX, its portfolio valuation solution, to connect both the cleared and non-cleared business flow to provide mark-to-market pricing services including data collection and distribution functionality that financial institutions will require with CCP clearing.
“In eValueX we collect [the settlement prices], attach them to the OTC bilateral trades which are not going to be centrally cleared, and combine all that into one workflow. Therefore, we are able to collect the different settlement prices and automatically compare between them,” said Hod.
Just having the cutting edge and flash technology is not always enough. The tools must also be able to address a real need of its clients in a cost effective manner given the tight IT budgets.
This is why Derivative Path, a California-based new entrant, aims to address an overlooked segment of the derivatives market – uncleared swaps, where technology dollars are not generally earmarked for despite the clear need for increased automation and expertise to ensure processes are compliant with Dodd-Frank rules.
The California-based solution provider offers a trading platform, execution support and advisory services to financial institutions, including commercial end users who are largely exempt from the CCP clearing mandate but want support for their hedging activities and in meeting compliance requirements under new regulation, explain co-CEO and co-founder Steve Hawk.
To do this Derivative Path offers a trading platform for those lacking the scale or interest in investing in their own execution platforms but want to continue hedging. Also, key post-trade processing functionality, such as the ability to track trades, is supported to ensure users are compliant with new regulation.
The inclusion of regulatory advisory services to support compliance with Dodd-Frank is a central tenant of the Derivative Path offering, explains Hawk.
He said: “Some firms already have a back-to-back hedging programme for their own asset-liability hedging but are behind the eight ball in terms of keeping up with the regulatory changes, and uploading client data to a swaps data repository, for example, which is one element many haven’t thought about yet. We are seeing a lot of traction from clients who recognise they have to do more than they are doing, and relying on [a firm] that knows how this works for others similar institutions will be a great way to get [compliant] quickly rather than hire a lot of people to invest in something that is already available and when the budgets just aren’t there.”
Even with the constraints of Dodd-Frank, the relevance of interest rate swaps in this market hasn’t changed, These hedging products are still valuable for most of the financial institutions and end-users who are using this product to hedge, adds Pradeep Bhatia, also co-CEO and co-founder of Derivative Path. The combination trading/advisory solution aims to help those eager to maintain back-to-back hedging programmes.
Bhatia said: “I think it would be a shame if the institutions that were so comfortable using this product in their day-to-day activity, all of a sudden came to the conclusion that they didn’t want to use these products. So for us, the bigger goal was to continue to be a catalyst that people can use to enable continued use of these products. And yes, there is the extra work of complying with Dodd Frank, and record keeping and retention and reporting and we can solve that through the technology platform, but in time the burden of compliance of law should not move you away from continuing to use a product that is proven to be quite relevant in your business for a number of years…”
Derivative Path, as well as many other service providers and solutions vendors, are also offering more ‘pay as you go’ type pricing models to allow clients to manage the costs along with growth and pay via incremental revenue. ”This allows people to evolve but ensure compliance with regulation as they grow,” notes Hawk.
Duco also offers flexible pricing. Nentwich likens the Duco Cube pricing model to a mobile phone contract where the client only pays for what is used and without upfront costs for implementation.
He said: “[Our pricing model] is more of a model that comes from the consumer world and it is becoming more and more interesting to the banks. Some [firms] get concerned about what happens when volumes shoot up but we have ways of addressing that as well. We want to remove the decision making process where you have to prepare to sign off a big cheque rather than just pay as you grow.”