If there was a single moment when Numerix could be said to have proved its mettle in the pricing of complex derivatives, it was during one of the most infamous episodes in financial history – the unwinding of Lehman Brothers. Competing against 20 others, the vendor was chosen in 2009 to represent the creditors of the defunct bank in valuing more than a million terminated trades.
"We showed we were capable of what would be one of the most complex derivatives valuations in history when they asked us to value 100 exotic trades, and the other vendors all came back with 100 trades priced, but we only priced 90," recalls Steven O'Hanlon, chief executive and president of Numerix. "That wasn't because those last 10 trades were too complex, but because they weren't actually real deals. We were the only vendor with the quantitative expertise to work that out."
Fast-forward seven years, and derivatives pricing has changed almost beyond recognition, as a suite of add-ons has gradually been added to the mix. What started with the credit valuation adjustment (CVA) to account for the risk of counterparty default has now extended to capital, debit, funding and margin valuation adjustments, collectively known as XVAs.
The computational power and quantitative skills required to calculate the XVAs in real time is such that many banks have looked to technology vendors for assistance. Numerix has moved with the industry, and just as it outpaced its rivals in 2009, clients say its XVA platform continues to lead the field.
"From a trader's perspective, speed is of the essence, and waiting several seconds for a Monte Carlo simulation can be painful, but we have been very impressed by the speed of Numerix relative to its competitors. It's also very flexible and can be integrated with our front-office trading system, while allowing us to build our own pricing models independently," says Frederick Shen, head of global treasury business management at OCBC.
We showed we were capable of what would be one of the most complex derivatives valuations in history when they asked us to value 100 exotic trades… but we only priced 90
Steven O'Hanlon, Numerix
Since launching a CVA platform in 2011, Numerix has evolved its offering through several iterations as market demands have changed. Forthcoming regulatory changes, including margin requirements for uncleared derivatives and the Fundamental review of the trading book (FRTB) will also affect pricing, so the firm has had to adapt and tweak the platform accordingly.
The latest version, dubbed OneView, brings together multiple strands of functionality so firms can monitor and manage their market risk and counterparty risk from a single point, accessible to the chief risk officer as well as to individual trading desks and other functions across the enterprise. Of Numerix's 700 clients, 20 are using OneView today, but the company expects that number to rise to more than 100 within three years.
"The regulatory picture has become a lot clearer over the past year, and firms want to get their data and analytics under control at an institutional level, reducing the overall number of platforms and databases they operate. OneView brings everything together to manage XVA, market risk, collateral and FRTB requirements in one place," says Satyam Kancharla (pictured), chief strategy officer at Numerix.
Institutions can choose to adopt individual components of OneView on a modular basis rather than taking the full platform, and Numerix increasingly finds itself tailoring its technology to the needs of individual clients, which can naturally vary from one region to the next. Implementation time also varies depending on the particular firm, but often has to be driven by regulators' deadlines.
"The platform is designed to be very open and configurable and we typically have financial engineers working with clients to ensure efficient and effective implementation. In some cases, the pressure to meet deadlines has been very high, and we have had to get clients from start to finish within three months to avoid penalties from regulators," says Kancharla.
OneView brings everything together to manage XVA, market risk, collateral and FRTB requirements in one place
Satyam Kancharla, Numerix
One such client was the investment arm of a global insurance company, which had an existing relationship with Numerix and migrated over to OneView in record time last year. "We were facing some fairly strenuous calculation requirements from our regulators. The challenge typically is that you end up with a large set of data to process on top of your standard calculations. OneView has really simplified the process and allowed us to efficiently get the data into the format required," says a senior official in the firm's derivatives team.
Reflecting on the journey Numerix has taken since the financial crisis and its work on the Lehman Brothers portfolio, O'Hanlon says the company has managed to bring multiple risk types together in a single platform by combining quantitative expertise with flexible technology that can scale to different parts of an organisation.
"In many banks, regulation is strangling businesses because of the increased costs associated with both manpower and systems, so there is a growing focus on transformation projects that will reduce the number of systems and allow them to grow in the future. OneView is perfectly suited to that transformation agenda," says O'Hanlon.