The drive for automation

Trading technology

Technology vendors tend to explain the services they offer in terms of the lifecycle of a trade, which can broadly speaking be broken down into pre-trade and post-trade events. In reality, the entire trade lifecycle is a series of complex functions involving manual intervention at different stages. Each instance of manual intervention increases the amount of time it takes to process and settle the trade.

The holy grail to all of this is STP, or straight-through processing, where the transactions can be conducted electronically without the need for re-keying or manual intervention. And technology vendors have focused heavily on such solutions, especially in relation to the post-trade part of the lifecycle.

But vendors are also looking at developing solutions for the front office, both in terms of pre-trade risk management and trade execution itself.

This is an effort that is being driven in part by calls for greater transparency in the credit markets following the credit crisis and against the backdrop of a regulatory drive for a credit derivatives clearing house as well as an anticipated migration of credit products from the over-the-counter (OTC) market to exchanges.


Murex's MX.3 platform is a front-to-back solution that is used for risk management and processing, right through to settlement and accounting. It has cross-asset functionality, especially for the buy-side, ranging from pricing sheets to market data calibration or portfolio management.

At the heart of the MX.3 platform is a set of risk management components - Murex VaR (Value at Risk) Server, Murex Limit Controller, MLC Compliance Monitor, Murex Collateral Manager - that provide a foundation for firm-wide risk management.

The Murex VaR engine provides parametric, historical or Monte Carlo VaR. Market value distributions, marginal VaRs and component VaRs can be evaluated and displayed at any consolidation level (such as portfolio, instrument or counterparty). Stress-testing and back-testing functionalities are also available. The Murex VaR engine can be deployed in an enterprise framework for transactions coming from within the MX.3 platform or from third-party systems.

Murex Limits Controller is the limits management component of the MX.3 framework. A variety of real-time limit authorisation and excess management workflows are available as well as real-time web-based reporting and email notifications. MLC can be deployed for credit risk limits, market risk limits, trading and operational limits or Basel II capital management. The MLC Enterprise Edition is suitable for third-party banking or trading systems for global limits monitoring.

MLC Compliance Monitor can be used as a central compliance monitoring tool (pre-trade and post-trade compliance). Typical compliance rules monitored include concentration and diversification rules, exclusions and statistical measures.

Murex Collateral Manager covers collateral management screens, automated reconciliation tools, native integration to the risk management framework and the possibility to embed collateral legs in structures. This makes MX.3 suitable for enterprise-wide collateralisation, including OTC derivatives.

Murex's credit derivatives module offers a unified pricing framework across a wide range of credit products and detailed valuation of credit events. It provides risk management across credit-related products using different revaluation methods (CDS, bonds, asset swaps, etc.).

Risk-free interest rate exposure as well as foreign exchange exposure are monitored in a real-time book simulation. Integration in risk management and operations is fully transparent.

"We offer our clients a constantly evolving front- to back-office platform covering all types of credit derivatives and credit-dependent trades, such as bonds, credit default swaps, credit indices, credit-linked notes, CDOs, index tranches, hybrids, ABS, emerging market bonds and more," says Antoine Mourad, CEO of Murex North America. "Our aim is to shorten time to market for innovative products by enabling our clients to easily structure them and plug proprietary knowledge when relevant."


"Our system already has front-office trading capability," says Pontus Eriksson, product manager for SunGard Front Arena. "But so far the potential hasn't been entirely realised because you need execution connections for that and it's only the market-makers in the OTC markets that have them. If credit products migrate on exchange, however, then we can expect to see that side of the product come into its own."

Established in 1987, SunGard Front Arena (originally Front Capital Systems) remains a pioneer in financial software development. "As credit deals escalate in volumes and complexity and regulatory pressures mount, traders' needs are changing," says SunGard's Eriksson. "Juggling thousands of trades in spreadsheets is not a sustainable option; nor is relying on systems that were never designed for credit."

Front Arena's coverage includes a front-to-back infrastructure for deal capturing, pricing, position management, risk management and processing across the whole credit spectrum. It allows processing support in an STP environment, including automatic generation and management of confirmations, settlements and accounting postings.

With support for credit derivatives and other asset classes, traders can create exotic products and hedge risk. Trades are processed in an automated fashion, from deal capturing through to the back office.

A credit default swap flow trader needs access to an automated trading infrastructure, such as T-Zero, for automated trade matching, says Eriksson.


Launched in 2005, T-Zero was created to help improve operational efficiency in the CDS market with a primary focus on front-office trade date affirmation. Today, T-Zero is one of the most widely adopted trade affirmation and novation consent platforms for credit derivatives.

"From our standpoint, T-Zero is a great risk mitigation tool, especially on legal risk," says an analyst in the sales and marketing division for credit derivatives at a US bank in London. "There has been a huge surge in the volume of credit derivative trades so problems can arise when it comes to the matching up of trades. T-Zero brings out any errors early on with straight-through processing."

When a dealer sells a credit default swap, he enters the trade into his trade capture system, such as Front Arena, to which T-Zero is connected. T-Zero then shows the trade to the buyer through a range of mediums, like the internet or Bloomberg, and receives a confirmation that the deal has been completed. The buyer may put allocations on the trade, which T-Zero then communicates back to the seller. Any errors are thus quickly exposed. The whole process can take as little as a few seconds, or, at most, a few minutes. There are presently 230 registered buy-side users on the T-Zero system.

"T-Zero is basically a common sense system," says Mark Beeston, London-based president of T-Zero. "With straight-through processing for credit derivatives, we force out any errors upfront so that there is no confusion as to who did what with whom."

While the credit market has made great strides towards reducing operational risk through the standardisation of legal documentation, maturities, payment dates, credit fixings and valuation, a sustained increase in transaction volumes presents a huge operational burden.

"In an industry that is experiencing rapid growth and huge operational challenges, the smooth interoperability between business-critical technologies such as T-Zero and Front Arena is fundamental," says Arnold Gast, head of credit at Delta Lloyd Asset Management, one of the first Front Arena customers to implement the interface.

Eriksson adds: "T-Zero's agnostic connectivity model provides buy- and sell-side clients with a trade affirmation, novation consent and connectivity service that extends its reach into all aspects of credit derivatives trade processing. Combining this with a trading and risk management solution such as Front Arena shows that strategic relationships between solution providers such as SunGard and T-Zero are providing infrastructures that pave the way for sustained future growth."

In the instances of electronic novation, clients pull trades off the T-Zero system, which is connected in real-time to the Depository Trust & Clearing Corporation's trade information warehouse. They then inform the banks with whom they executed the novation and the banks involved respond back with affirmation. Once the novation is consented, T-Zero sends the trade to the DTCC's Deriv/SERV system for affirmation and clearing.

This has become especially important since July, when 14 major market participants agreed with the New York Federal Reserve to submit novation requests via electronic platforms, rather than email, by the end of 2008. T-Zero has processed in this way since March 2006 and now T-Zero's electronic novation consent is the lead technology in addressing these commitments. Investment advisors can have their trade capture systems auto-novate trades in T-Zero, and dealers and prime brokers can access automatic novation consent.

Murex's Mourad believes that trade affirmation will undergo a period of rapid development as regulators increase pressure on the credit industry to streamline its operations, reduce outstanding notional amounts and catch costly and time-consuming trade disputes early on.

"Electronic novation is a growth area, whereby another party has to step in to sit on the other side of a trade," says Mourad. "The Lehman Brothers bankruptcy has put novation on the map and there is a strong mandate for automation in that area."


When it comes to the buy-side, Misys has more than 800 customers for its Misys Confirmation Matching Service (CMS) - formerly Misys Treasury Plus - including over 70 fund managers, asset managers and hedge funds.

Using Misys, CMS clients can achieve STP by automatically uploading trades into the Misys confirmation engine. In November, Misys won the 'Best Trade Processing Product' accolade in European Banking Technology Readers' Choice Awards for the second year in a row.

Adam Boukadida, treasury systems manager at Tesco, comments: "Since implementing Misys CMS, the number of trades confirmed electronically has risen by 80% and we're now looking to push this as close to 100% as possible. Our previous confirmation matching system offered limited instrument coverage and did not fully integrate with our treasury management system. Misys CMS was able to demonstrate its broad asset class coverage, and full two-way integration with our treasury management system."

Neil Macro, head of sales for EMEA at Misys Confirmation Matching Service, says: "We've recently added major new functionalities to our fully hosted and web-based solution including a redesigned standing settlement instructions summary screen, which allows users to customise and simplify views and run reports and view billing details. I believe our clients are feeling the added benefits of our innovation to their businesses."

Misys CMS mitigates risk by improving communications with custodians and brokers, eliminating slow and error-prone fax and paper confirmations and notifications by sending automatic response messages (MT304s) to the custodian upon trade confirmation and by automatically enriching messages to brokers with settlement instructions every time a trade is sent. Counterparties automatically receive change notifications every time the client updates standing instructions.


Calypso Credit Derivatives is a trading, risk and trade processing software solution supporting financial institutions ranging from global bulge-bracket banks with flow trading operations to the most advanced credit hedge funds. Calypso supports the full trade lifecycle for treasury and derivative products, from front to back office, fully integrated with risk.

Calypso's 'What-if' pre-trade and post-trade analysis functionality allows traders to model shifting spreads, correlation, volatility and recovery rates using market data and view the impact on trades and portfolios, even before the trade is booked, enabling sophisticated real-time risk analysis for credit derivatives.

Gerard Rafie, vice-president of marketing at Calypso, says: "So far technology in the credit markets has focused largely on the middle and back office. But as calls for transparency increase, we see more growth potential in the front office and trade execution applications."

Traders can track risk measures using various types of stresses and drill down to individual positions to highlight individual sensitivities. They can re-evaluate risk by industry, sector or rating, or by position on the yield curve. Trade affirmations and confirmations are handled via interfaces to T-Zero and DTCC, so that outstanding confirmations are tracked automatically.

Calypso's eXDesigner and eXPricing Sheet gives traders greater flexibility in structuring, pricing and packaging new products across asset classes. Traders can design templates for new products that include combinations of underlying instruments and exotic structures without programming. Traders are able to define a simple trade entry sheet with validation rules for the package. This means firms shorten time-to-market for new products while reducing errors, enhancing compliance, risk management and productivity.

The user defines how often financial data is pulled from the calculation server to the presentation server for display and analysis. Clients can slice and dice data with Calypso Workstation, based on user-defined scenario configurations - credit flow, correlations, volatility - of counterparty, name, product or rating segmentation.

Credit structurers can also create a custom portfolio with a complete capital structure pricing (equity, mezzanine and senior tranches) for CDOs. CDO managers can make substitutions on a basket and manage the subsequent changes to the trades. Synthetic portfolio optimisation is available through Calypso's Codefarm interface, which allows users to make substitutions.


Codefarm's Galapagos platform is an online service that helps investors, managers and structurers of CDOs maximise returns given a certain amount of risk, or reduce risk given a minimum need of return. And, in this year's credit environment, it has very much been the latter strategy that has come to the fore.

"Many clients started using the system in 2008 and observed dramatic improvements in their ability to facilitate defensive trading," says John Mooren, chief marketing officer at Codefarm in London. "The Galapagos platform is a good example of defensive innovation, improving the flexibility and adaptability of the market players in response to serious economic volatility."

To assist clients in their shift of focus, Codefarm introduced new algorithms to restructure or actively manage synthetic CDOs and to maximise the rating cushion - in other words increase the stability of the deals to better withstand downgrades and defaults.

"A trend towards transparency in and around risk models following the subprime losses and the credit crunch is a promising development that will hopefully instil trust in traditional investors," says Mooren. "However, structuring and managing CDOs is still a complex process, the challenge of which is finding the efficient frontier with its complex set of objectives, credit opinions and restrictions."

Galapagos helps CDO arrangers and managers protect and enhance the performance of all of their deals in parallel and with minimal effort. It provides an optimisation engine applying search algorithms across a hosted grid. It is fully integrated with pricing and ratings models and data feeds.

"The real beauty of the algorithm on which Galapagos is based is its versatility," says Mooren. "Last year we saw clients seeking to improve returns, this year it's been about reducing risk based on ratings, and since September we've seen a move away from ratings, in which many have lost confidence, and a move towards enhancing subordination of the CDO to minimise the risk profile of the structure. We are talking to several investors about a more transparent model to assess the risks embedded in tranches."

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