Risk 25 firms of the future: Murex

Maroun Edde, Murex

It's hard to find anyone involved in financial markets with a good word to say about the current environment of risk aversion and regulatory upheaval. Maroun Edde, Paris-based chief executive of trading and risk system vendor Murex, is an exception. “For a company in our space that is willing to take some bets and invest, it is one of the most exciting moments of the last 15 years,” he says.

That’s because the needs of Murex’s customers  are changing. With trading volumes shrinking and margins contracting, banks are seeking to maintain profitability by competing on efficiency. The result is a kind of industrialisation of technology that Edde compares to the automation of assembly lines by car manufacturers. But while the automotive industry changed almost organically over a period of decades, banks are trying to achieve something similar in a period of years. That’s a challenge because bank systems need to remain flexible, Edde says. Innovation hasn’t disappeared from finance – it simply has a new focus.

“Before the crisis, when margins were wide, it only required a certain level of precision in pricing to make money. Now that margins are lower, banks have to be considerably more precise in how they describe and predict the behaviour of the market, so they need a new generation of analytics and models,” he says. And the analytics must now include real-time risk management.

Edde extends the car industry analogy to the quality control process. Manufacturers initially measured quality when the car came out of the factory, but later realised that guaranteeing the end-product meant assessing and measuring quality at every step of the production process.

“A few years back, when large banks traded swaps, credit risk was calculated after the fact and didn’t necessarily mean very much,” he says. Now, banks must measure credit risk at the inception of a trade, bringing front-office staff into the process and forcing line managers, business heads, the middle office, the corporate risk function and senior management to take responsibility. “Risk is not just one part of the chain – it’s everyone’s problem,” he says.

As a result, Murex bets that computation demands will increase and speed will be critical (Risk February 2012, pages 62–64). The company spends almost one-third of its annual revenue of more than €300 million on research and development, which resulted in the decision to convert its code to run on high-performance graphical processing units. This was put into action in the past two years. “We can compute Monte Carlo simulations 100-times faster than before – using cheaper hardware,” says Edde.

And while systems must be faster, they must also be able to scale up to handle dramatically increased volumes. There are greater concentrations of trading in certain products and markets, pricing is being broken down into many smaller elements – from counterparty credit adjustments to liquidity premiums – and transaction times are shrinking. “As a supplier of trading and risk platforms, we have to say to clients we cannot only handle twice their current volumes, but 50 times their volumes. It’s not an easy problem, but it is one we have to solve,” he says.

In the drive for efficiency, finance can learn lessons from the internet. Companies such as Amazon and Google have learned how to separate the business elements of an application from the underlying technology. The same approach could emerge in derivatives technology, where 70% of the code in a pricing application can be generic – used to manage things such as parallel computing, computation of sensitivities and contribution to risk scenarios. By standardising and automating these processes, a technology supplier can save banks a huge amount of effort involved in creating new applications, says Edde. “There are new technologies and methodologies that enable you to take the heavy part of the programming away from clients and allow them to focus on the business content.”

This opens the door to a bigger change in the way banks approach technology. In the future, trading and risk system suppliers could take over whole functions and operate them as service utilities – possibly in partnership with a group of banks. It is early days, but Murex sees it as the future.

“Some banks are starting to think in terms of business process outsourcing – pooling of middle- or back-office processes such as the management of static data. It is better to anticipate the trend of banks not doing everything for themselves than wait for it,” he says.