For Structured Products in Sweden (SPIS), an industry association established in 2013 for Swedish structured products manufacturers, the advent of the Packaged Retail and Insurance-based Investment Products (Priips) regulation offered a big opportunity to standardise market and credit risk calculations among its members.
Priips, which comes into force in January 2017, will require standardised ratings for structured products, but issuers remain at odds over how the risks of the investments they sell to retail clients should be disclosed. Given the size of the local market in Sweden and the complexity of some of the products on offer, and with ongoing uncertainty over the Priips technical standards, SPIS was keen to introduce risk indicators that could be used straight away.
The association needed a partner to help implement its methodology whilst educating its members on the new indicators and providing an outsourcing option and validation service for their calculations. The methodology also needed to handle credit-linked notes - a popular instrument in the Swedish market, for which there were no standardised risk indicators.
Modelity Technologies fit the bill on all counts. The company has specialised in technological support services for the manufacture, marketing and operation of structured products for more than 10 years. While SPIS members are free to choose an alternative provider or calculate the indicators themselves, 10 of its 15 member firms are already using Modelity.
"Modelity is professional and solutions driven, and they understand the needs and challenges of the structured products market. Not only do they have technical competence, they also fully understand the existing and emerging regulatory requirements, such as Priips, and how the market must adapt to be compliant," says Stefan Sonnerstedt, chief administrator at SPIS until September this year.
We built our methodology in a flexible way where users can input their own ideas and build their own risk indicator modelling into it
The association hired Modelity in November 2014 and the platform was completed by the following August. Among the more complex of the risk indicators is one SPIS calls ‘average downside', which involves running Monte Carlo simulations on a product's performance, converting the results of all positive scenarios to zero and generating an average loss from those scenarios for which the results are negative.
Modelity went one step further than the SPIS standard, which only requires the calculation of risk indicators once products are launched. As risks change during the lifetime of a product, the platform allows for revaluation at any point in time.
"The SPIS standard does not rank products after their launch, but clearly financial advisers and clients will want to have this ability, which is already available for funds," says Sonnerstedt.
The platform includes additional functionality, such as analysis during the design process to enable users to better understand the risk and return profile and the provision of support documentation and other information once the products are live. Although SPIS had specific requirements for its standards, Modelity built flexibility into the platform to accommodate a variety of approaches.
"We realised that different countries might have different views on how risk indicators should be calculated, so we built our methodology in a flexible way where users can input their own ideas and build their own risk indicator modelling into it," says Eran Elad, vice-president for structured products sales at Modelity in Tel Aviv.
Modelity has also been active elsewhere over the past year, supporting its growing European client base, which includes Barclays, Commerzbank, Danske Bank and Royal Bank of Scotland. When Finnish fund manager Estlander & Partners decided it wanted to expand into structured products in mid-2014, it turned to Modelity.
"We wanted to set up the new structured products business in a streamlined way without a lot of traditional overheads. Modelity provides us with a full platform to help deal with product design, marketing, training and after-sales support. Also, when we are looking at product ideas, Modelity gives us the tools for historical stress testing and future performance simulation so we can ensure the products we offer are sound," says Henrik Hermann, head of structured products at Estlander & Partners in Helsinki.
Among other developments, Modelity has continued to enhance the automation of legal documents, such as term sheets and information letters, creating templates in the familiar environment of Microsoft Word with links directly into Modelity's platform for carrying out calculations and analysis.
Modelity also responded swiftly to the thematic review of structured products development and governance published by the UK Financial Conduct Authority (FCA) in March 2015, which identified weaknesses in the way some firms approach structured products.
"Modelity extensively researched the review and the FCA's 2012 guidance on product development and governance and, using its field experience and technological capabilities, designed an independently run solution that can be used by product providers to comply with the guidance," says Elad.