Structured Products Europe Awards 2016
The implementation of the Packaged Retail and Insurance-based Investment Products (Priips) regulation hit the buffers following the European Parliament's rejection of crucial technical standards in September – a move that all but forced the European Commission to delay introduction of the new regime by 12 months to December 2017.
However, it is unlikely the changed deadline will narrow the scope of the rules, or the scale of their likely impact on the structured products market.
At its heart, Priips is all about transparency, encapsulated in the mandated use of a key information document (Kid) by issuers. This must be provided to retail consumers and present the main features and risks of certain investment products, explaining how they work and what they cost. The concept is reasonably straightforward, but implementing it consistently across thousands of products and entities is mightily complex.
"Meeting the documentation requirements of Priips involves dealing with a lot of calculation issues. Given the diversity of the structured products market, banks need robust systems in place to run calculations quickly on thousands of products and scenarios to generate the Kid," says Eran Elad, vice-president for structured products sales at Modelity Technologies.
Since it was founded in 2000, Tel Aviv-based Modelity has built a significant footprint in the provision of technology to the structured products industry. Its flagship Modelity/Structures product seeks to enhance the relationship between seller and client by increasing transparency and helping to explain product features, replicating the ethos of Priips.
Over the past two years, Modelity has used its expertise in analytics and documentation to create a one-stop-shop solution for the generation of Kids, supporting structured products across asset classes as well as over-the-counter derivatives and listed products. Judges recognised the vendor's strong track record in documentation and its expertise in product governance and document comparison, which has made this a compelling offering for those hunting for Priips compliance.
Using sophisticated text-generation technology, Modelity can automatically build a Kid for each product defined in its system. Linguistic differences and subtle variations in the way products are described are addressed and filtered to produce the concise and standardised three-page document required by the regulation.
"Although the Kid itself is fairly short, it is complex to draft because there are so many different types of product and payoff, which must each be described in a different way. We break down those payoffs into sets to allow the document to be easily tweaked by the end-user without having to maintain hundreds of document templates," says Elad.
"As the Priips framework does not go into all of the details on every investment product, we have worked closely with our clients and other leading manufacturers in the market to tailor our methodology to a variety of complex investments, such as credit-linked notes and hybrids, investment strategies, callable products and others," he adds.
It is the calculations underlying each Kid – such as the summary risk indicator and performance scenarios – that can be most resource-intensive for market participants to compute. Modelity uses performance grid computing to enable it to process thousands of Kid calculations per day and multiple Kid generation requests per second. Each calculation is broken down into individual computation tasks that are distributed to multiple servers and then collated into the final document.
"Some banks use a vendor for documentation but do the calculations internally, or vice versa, but we differentiate ourselves by specialising in both the documentation and the calculations. We also provide supporting analytics so banks can fully understand and validate the calculations our system generates," says Elad.
If uncertainties over the implementation of Priips are a concern for issuers and distributors, they are equally if not more worrying for technology providers such as Modelity, which must have its products ready for the rules well ahead of deadlines.
With the regulatory technical standards up in the air, it is possible tweaks could be made that would require Modelity to revamp its systems.
If the regulation is implemented as planned at year-end, before disagreements over the technical standards are resolved, the lack of clarity over exactly how the Kid should be structured would present a major challenge. Conversely, if late changes are made to the standards, that could require a quick revamp of systems to allow compliant Kids to be generated when required. Modelity has prepared for both scenarios.
"We have tried to identify reasonable solutions to all of the key outstanding issues so we can do a quick development. Clients also need to focus on testing and making sure they have a strong, error-free workflow ready to feed products into the system on day one," says Elad.
The week on Risk.net, December 2–8, 2017Receive this by email