Technology innovation - Numerix

Technology providers in the structured products industry have endured one of their busiest years yet. The credit fallout and the bankruptcy of Lehman Brothers has meant that many market participants (buyers and sellers) have shifted towards risk, regulatory compliance and accounting in terms of valuations of not only individual structured products trades but also entire portfolios. Pricing and analytics provider Numerix eyed the trend early and has skilfully adapted to the shift in focus by developing new counterparty risk analytics within its Numerix 7 product, which is designed to model and price deals across multiple asset classes. The technology provider has also enhanced its Portfolio products with new applications specifically targeted at the insurance industry, and has gained new insurance clients (among 28 new Americas clients over the past year) while also making headway in the Latin American market.

"There is less emphasis on pre-trade pricing and price discovery," says Steve O'Hanlon, president and chief operating officer at Numerix in New York. "As a result of this renewed and increased focus, clients are using Numerix products in new ways. There has been more demand for products to be used inside risk platforms as a part of valuation services from custodial banks and hedge fund administrators. A few years ago, some of these organisations only provided at best 50-60% valuation coverage of exotic deals and it was sufficient for them to tell their clients they would rely on dealers' prices because they didn't have the ability to calculate risk. This is not the case any more."

Numerix 7 counterparty analytics is designed to help institutions better understand and control their counterparty exposure during pre-trade discovery. The main features of the product allow a client to calculate current exposure, potential future exposure, credit value at risk, credit valuation adjustments and incremental counterparty risk of a new trade. In addition to the Numerix 7 in Excel integration, the counterparty risk functions are in the Numerix Software Developer's Kit (SDK), whereby institutions and application partners can integrate counterparty risk calculations into their own proprietary systems.

Counterparty risk has become more important to structured products participants as a result of the Lehman default, and has led Numerix to embark on an extensive process of developing a cost-effective counterparty analytics product so that even the smallest clients could afford to use it. "Our client base comprises large brokerages, insurance companies and so on, but we also have a large coverage of middle-tier banks and buyside firms," says O'Hanlon. "We therefore had to come up with something that was cost effective in terms of hardware requirements. Our team worked on analysing the kinds of deals our clients have in their portfolios from the vanilla to the most exotic, and we came up with a way of producing these values in a faster way on a lower-cost platform using video processors, which accelerate the calculations of exotic instruments in one thousandth of the time it took before."

Meanwhile, capitalising on a turbulent year, the technology company has also managed to capture 15 new insurance companies as clients, with many in the insurance sector beginning to use Numerix Portfolio (a front office structuring, trade capture and portfolio management system for fixed income, credit, equity, and foreign exchange exotic derivatives and vanilla products) for structured products, asset liability management, monitoring and hedging their portfolios, which include structured products.

"Over the past two years, insurance companies from the asset side of the business as well as the liability side of the business, primarily in the life and annuity space, started facing more and more challenges in hedging the risk of their variable annuity policy holders," says O'Hanlon.

"We brought Numerix in to handle our more exotic deals because our traditional systems couldn't deal with them," says one insurer. "It also stepped up and worked with the liability side of our business, helping it model the capital market risks embedded in our liabilities, which is really critical for insurance companies. From a client service perspective, Numerix has been tremendous. We have also moved along its product chain from its Excel product to SDK and are now using Numerix Portfolio."

The analytics provider has also expanded its coverage of Latin America. It has a dedicated team covering the region and it signed a contract with one of the largest banks in Brazil, which has a very strong need for vanilla and semi-exotic pricing and risk management support, and whose business was moving towards structured products. The Brazilian bank was looking to replace five to 10 analytics vendors' systems with one product. Numerix embarked on a four-month process constructing and developing local support such as local interest rate curves and inflation instruments. The bank is now decommissioning the original vendors' programmes.