Given the challenges posed by the Asian market, firms are becoming highly selective when choosing a technology vendor to support their structured product activities. Low volatility and interest rates and tightening credit spreads have led to demand for more hybrid products, requiring the flexibility to quickly prototype and accurately price a broad range of products, including exotics. Modelling transparency is now essential. Cost is an issue where margins are under pressure, while ease of integration with existing front-, middle- and back-office infrastructure is also important, especially for firms with limited IT resources. Then there is the critical factor of the credibility of the vendor itself.
Paris-based Pricing Partners made a giant leap forward in the latter regard in June 2013 when it became part of Thomson Reuters. Not only is its Price-It cross-asset modelling library now part of the global information and software provider's pricing service, but Pricing Partners is now backed by Thomson Reuters' considerable regional resources and expertise in Asia.
This relationship was a defining factor in Pricing Partners recently winning a major Taiwanese contract in the face of competition from leading global vendors. The institution was looking for a complete system for risk management - incorporating data management and complex structured product pricing - at the holding company level to support operations across all business units, including commercial banks, brokerage, insurance and asset management.
"Thomson Reuters already knew the institution and understood its in-house processes, and the institution had confidence in Thomson Reuters," says Xavier Deschamps, Paris-based general manager and global head of sales and marketing at Pricing Partners. But although its parent company got it through the door, Pricing Partners still had to prove it could deliver a solution that met the institution's requirements, which is where another of the company's recent innovations played a critical part.
Price-It has long been available as an Excel add-on, via an application programming interface or a full source-code version for advanced flexibility and customisation. Over the past year, the company developed the Price-It Framework, which is based on web services technology that makes it easier to integrate the analytics library with existing in-house infrastructure and uses a multi-process architecture for high performance. The Taiwanese institution is implementing the Price-It Framework for internal model validation and value-at-risk calculation on exotic products.
Pricing Partners has also extended the range of models in its library - over the past year it has added new stochastic local volatility models and support for products such as exotic versions of target accrual redemption notes and target accrual redemption forward notes, as well as the Nelson-Siegel-Svensson model for estimating yield curves.
"We have also seen increased interest in notes and total return swaps on algorithmic indexes in major cities such as Hong Kong, Singapore and Tokyo, while sophisticated quantitative strategies on volatility arbitrage with rolling options indexes and strategies with variance swaps have become more and more popular," says Deschamps. To support these activities, Pricing Partners has continued to upgrade its library to encompass a wide range of algorithmic indexes, he says.
The comprehensive nature of its modelling library has been important for long-standing users of Price-It, including Daewoo Securities, Hana Daetoo Securities, CITIC and Industrial and Commercial Bank of China (ICBC) (Asia), as well as more recent clients such as Maybank Singapore.
Maybank Singapore adopted Price-It as a reference for its in-house exotic models. "Compared with the rest of the software vendors we looked at, Pricing Partners had the optimum mix of transparency of methodology, and range of structured products and models," says J See, vice-president in the model validation unit at Maybank Singapore.
Transparency has also been an important factor for ICBC (Asia) in enabling more effective in-house communication about risk. The bank has been using Price-It Excel for more than three years for pricing structured products that cannot be catered for by its main treasury system, as well as building quick prototype pricing models for new structures, and performing backtesting, stress testing and scenario analysis of pricing models.
"Due to Price-It's easily understood script language and user interface, we were able to communicate our work with the middle office without having the need to go through every single step with them. It also allows us to do a lot of fast prototyping that couldn't be achieved with other similar software," says Calvin Kwok, Hong Kong-based senior quantitative analyst in the global markets and trading department at ICBC (Asia).