Modular tech and micro-services – plus new risk and regulatory needs – are creating openings for insurgents and incumbents. Clive Davidson looks at the stories behind this year’s Risk Markets Technology Awards.
The pressures and constraints under which institutions have been operating since the onset of the financial crisis have forced trading and risk technology to evolve. In the old world, vendors offered standalone specialist systems; in the new world, they have been forced to become more flexible, by integrating with existing infrastructure, and more modular. Instead of taking everything, customers increasingly want to pick and mix.
This is creating openings and opportunities for narrowly focused financial technology – known as fintech – firms, for example, in the fields of collateral management and buy-side risk management.
Ongoing regulatory change and emerging risk types are also opening up opportunities for new technology providers to step in, or for nimble incumbents. The Fundamental Review of the Trading Book (FRTB) is redefining market risk in a way that has allowed one previously credit risk-focused provider to get a foot in the door, for example. The absence of climate change data that can be applied to asset portfolios is a pressing need being addressed by one new entrant translating scientific projections into market signals.
This year’s Risk Markets Technology Awards reveal a sector in flux. The judging panel of practitioners and Risk.net editorial staff recognised a mix of incumbents and insurgents that were able to demonstrate they had responded to the market’s changing needs.
CloudMargin spotted the potential of cloud in 2013. By hosting a single instance of its software on a cloud platform, the firm could slash maintenance and upgrade costs, and compete at the lower end of the market. But it is one thing to pick up smaller clients around the fringes of the buy side – as CloudMargin did initially – and another to go head-to-head with incumbent providers at the top of the sell side. That’s what the vendor has succeeded in doing this year, signing up two tier one banks for its service – and not just as an add-on to their existing capabilities. In one case, a bank is moving its entire collateral programme to CloudMargin in its first venture into public cloud deployment.
“We have not rested on the fact we had a first-mover advantage in this area,” says Simon Millington, head of product management at CloudMargin, winner of the collateral management and optimisation product of the year award. “We have continued to invest in the platform and have changed tack quickly where we have needed to in terms of features and functionality, as well as our development road map. And we have taken advantage of the regulatory tailwind in the industry.”
CloudMargin has doubled its staff each year for the past three years and has boosted resources for product development following a $10 million investment this year from LVC, the venture investing arm of Jeffries Financial Group, IHS Markit and existing investors including Illuminate Financial. It also changed strategy two years ago to go after larger institutions, both buy and sell side. “That has paid dividends. Having large marquee clients on the platform enables us to further invest because we have the confidence and references in this space,” says Millington.
The key difference between servicing a small collateral client and a large one is the volume of data that must be handled, says Millington. To support greater data volumes, 18 months ago the company re-engineered the back end of its platform to become a ‘microservices architecture’, where functionality is packaged as a menu of independent, interacting services. Furthermore, the microservices are designed to automatically scale up, monitor and replicate as required. “This means the platform is inherently scalable – up and down – and that is a key differentiator for us in the market,” says Millington.
CloudMargin is also redesigning the front end of its platform to give users more access to information on their workflows and improve straight-through processing, in addition to other changes that address the needs of the new, larger clients.
CloudMargin’s penetration of the top tier shows even the largest sell-side institutions are now looking to cloud-based services to help reduce costs, simplify technology infrastructure and improve the services they can offer to their clients via the cloud’s online accessibility.
Cloud-first technology policy
The buy side, meanwhile, has taken this a step further – to the point where many firms now have a ‘cloud-first’ technology policy and accept installed software only where there is no cloud option, says Ian Lumb, global head of risk solutions at Axioma, which won the buy-side risk management system award.
“This is a validation of our strategy when in 2011 we decided to build Axioma Risk first on the cloud, with open application programming interfaces (APIs) that are also accessible to clients,” says Lumb. “Cloud was a tough sale seven years ago, but now it is at the forefront of what firms are looking for – open systems with web service-driven APIs.”
The winners in full
Buy-side market risk management product of the year
Performance attribution product of the year
Best execution product of the year
Buy-side ALM product of the year
CCP support product of the year
Collateral management and optimisation product of the year
Mifid II product of the year
FRTB product of the year
Solvency II product of the year
Regulatory reporting product of the year
Market risk management product of the year
Market liquidity risk product of the year
Counterparty risk product of the year
XVA calculation product of the year
Pricing and analytics: Commodities
Pricing and analytics: FICC
Pricing and analytics: Structured products/cross-asset
Trading systems: Commodities
Trading systems: FICC
Trading systems: Structured products/cross-asset
Pricing and analytics: Equities
Market data vendor of the year
Alternative data vendor of the year
Four Twenty Seven
Risk data repository and data management product of the year
Electronic trading support product of the year
Best vendor for system support and implementation
Risk is highly suited to cloud computing because it requires bursts of intense computation for regular or intermittent – but not necessarily continuous – reporting, says Lumb. Having a full computational capability in-house is not only expensive, but also sits idle much of the time; the compromise approach of reduced hardware constrains performance and limits reporting abilities.
“Being able to scale up compute resources at will enables firms to produce reports in the time they want instead of being beholden to legacy technology and a limited set of central processing units that dictate how many hours a report will take. That is a complete change of capability for the industry,” says Lumb.
Axioma offers a modern, multi-asset risk platform that provides top-down as well as bottom-up revaluation views of risk, but does not purport to be all things to all people, he says. Asset managers are turning away from systems that attempt to offer a full stack of asset management functionality, Lumb claims – such systems tend to be satisfactory at everything but excellent at nothing – and instead are opting for best-of-breed applications for each function in a modular format that they can plug into their infrastructure to suit their individual requirements. Cloud-hosted, web services-based applications with open APIs using open standard technologies facilitate this, he says.
A data and technology FRTB solution
The changes to market risk introduced by FRTB have also encouraged banks to look for modular functionality they can integrate with existing elements of their infrastructures. When the proposals for FRTB were first aired, observers suggested banks might use the opportunity for a wholesale replacement of their market risk infrastructure. “Some of that has come to fruition, but we have seen more banks wanting to leverage what is working well supporting their Basel 2.5 and other requirements – rather than ripping out and replacing their entire market risk systems,” says Andrew Aziz, global head of financial risk analytics at IHS Markit, recipient of the FRTB product of the year award.
The financial risk analytics group at IHS Markit traditionally focused on applications for counterparty credit risk and various valuation adjustments – known as XVAs – so had little chance of competing in a system replacement market. “However, where we had an advantage is that FRTB, as distinct from previous regimes, focuses on modellable risk factors and the risk factor eligibility test,” says Aziz. “IHS Markit is fundamentally a data company that also has technology, so we were able to approach the market with a bundled data and technology solution, which gave us an entry point we otherwise wouldn’t have had.”
In 2016, IHS Markit introduced an FRTB modellability service in the form of a utility that was relatively low cost and therefore competitive. Once this gained traction in the market, IHS Markit realised there were other components it could provide. Since it is modelling risk factors, it could move reasonably easily into providing proxies for non-modellable risk factors, as well as scenario generation. In addition, banks need an aggregation engine that sits downstream of their valuation engine, enabling them to explore the impacts of decisions about such things as risk factor taxonomy and risk bucketing. Although IHS Markit does offer a valuation engine, banks that are not already using it generally prefer to stick with what they have.
Aziz says: “Market risk is a tough market with a lot of competition. Banks already have many components in place, such as valuation engines, that they are happy with, and very few want to do a radical restructure. Our strategy, which has been effective, is to provide modular solutions that are not so intrusive and can co‑exist with a bank’s existing architecture.”
Like IHS Market, Refinitiv, formerly the financial and risk business of Thomson Reuters, was fundamentally a data company, but has been redefining its business to meet institutions’ needs for not only data, but also the mechanisms to more easily integrate the data, and tools to analyse and apply the data to their operations. Over the past two years, the company has been transforming its technology from a traditional model of data centre deployment to public cloud. In July this year, the company made its Elektron Data Platform accessible via a cloud API.
The platform has also become more open and inclusive. Elektron has been broadening the range of data it offers – for example, adding data from all Authorised Publication Authorities under the revised Markets in Financial Instruments Directive (Mifid II) – and also allows clients to integrate their own data on the platform as well as third-party data.
“Our strategy has evolved to include not just market data and many other forms of financial data, but the platforms that allow customers to integrate market data from many sources, and services such as Velocity Analytics that enrich content with analytics,” says Brennan Carley, global head of enterprise at Refinitiv, which won the market data vendor award.
Pricing and analytics are fundamental to trading and risk management and there is a long tradition of specialists offering packaged libraries. Here too there is growing emphasis on not just providing content, but packaging it alongside tools that make it easier for firms to customise and integrate the libraries into their operations.
James Church, vice-president for products and research and development at Fincad, winner of the pricing and analytics award for fixed income, currencies and credit, says: “It is a principle of Fincad to get our analytics into the hands of as many users as possible and embedding them into their workflows right at the point where they are making valuations and risk decisions.” The company categorises users into three main groups – quants, IT developers and end-users such as traders and risk managers – and incorporates facilities and tools for each into its F3 pricing and analytics solution.
For example, for quants wanting to model new markets, Fincad has introduced market definitions for the top 30 liquid currencies. “But it is not just about giving people ready-made definitions – it is also important to give them the flexibility to take a view on markets. We provide tools that allow financial engineers to take their own view on a market, change model parameters, test their models and then publish them into our enterprise platform where they are under audit control, the data is managed and the models can be passed down the line to other users,” says Church.
For developers, Fincad has created standard APIs with the aim of making it easier to integrate the firm’s analytics into other systems. It has also added a development kit for the increasingly popular Python programming language and for building microservices. These facilities allow developers and quants to extend F3 to create customised analytics and reports for services such as hedging strategies, portfolio optimisation, backtesting and external limit testing, says Church. For end-users, Fincad has built an application in the HTML 5 web interface language, enabling users to package workflows for activities such as what-if scenarios and pre- and post-trade portfolio analysis and reports.
Making sense of climate change research
One area where there has been a dearth of capabilities is the application of climate change data to asset portfolios. It is not that the fundamental information has been lacking – global warming and climate change research are among the largest scientific endeavours ever undertaken and there is an abundance of studies and models globally. What has been missing is the ability to translate the scientific research into data that financial institutions and asset owners can use. Into this vacuum has stepped Four Twenty Seven.
“Rapid intensification of the effects of both acute climate events like hurricanes and wildfires and chronic effects such as sea-level rise and increases in temperatures present a new and meaningful type of exposure for investors,” says Emilie Mazzacurati, founder and chief executive officer of Four Twenty Seven, named alternative data vendor or the year. “This risk is currently only priced into the market ex post – we see corrections in asset prices in the wake of events only to the extent their exposure is known.”
To enable firms to price the risk ex ante, Four Twenty Seven extracts data from five leading climate models to project future climate states for 25 x 25km grid cells across the world, and assesses the risk presented by climate changes to relevant assets within those grid cells. To do this, the company has built a proprietary database of more than one million corporate facilities owned and/or operated by 2,000 of the world’s top companies, covering almost all of the MSCI All Country World Index, and maps the facilities onto the global grid.
“We score each facility for its exposure to climate change risk and then roll that up into a view of risk for a company,” says Mazzacurati. Four Twenty Seven also looks at the governance of host nations and states, and to what extent this might mitigate the projected impact of climate changes, and has plans to extend its analysis to companies’ governance of climate resilience as well. What Four Twenty Seven does differs from catastrophe risk modelling as used by insurers, which uses historical data to determine short-term probabilities of events and their impacts and focuses only on acute and not chronic events such as increasing heat and water stress, and rising sea levels.
Four Twenty Seven clients include corporations, pension funds, asset managers, development banks and regulators. “Clients use our data-driven analytics to understand risks in their existing portfolios, to assess risks of potential asset acquisitions and to engage with management teams to build resilience in supply chains and physical assets,” says Mazzacurati.
Overall, the awards show the fintech sector adapting to the needs of institutions operating in the constrained and pressurised environment that the financial crisis precipitated. But technology providers also need to acknowledge the mistakes they have made along the way and learn lessons from them, says Joanna Davies, head of regulatory reporting at Nex, now part of CME Group, which won the regulatory reporting product award.
Institutions and technology providers underestimated the impact of regulation such as the European Market Infrastructure Regulation and Mifid II and took their foot off the pedal when regulators delayed deadlines, says Davies.
“[Compliance with] Mifid II was a painful process for both clients and vendors, and the industry has reeled in the wake of the implementation of that regulation,” she says. “For clients to continue trusting a vendor – and particularly a vendor they have chosen for their global reporting obligations – it is vital they feel lessons have been learned.”
Nex Regulatory Reporting is determined to demonstrate it has taken the lessons on board in its response to the forthcoming Securities Financing Transactions Regulation (SFTR). “Although the regulatory technical standards are not yet confirmed and signed off, we have decided we will not put ourselves, our existing or potential clients at risk and are now in full development mode to have our SFTR solution ready for user acceptance testing by June 1, 2019,” says Davies. “SFTR requires 153 data fields, which is a lot of information for companies to store, and we are very keen to make sure we are one of the first vendors to get to market with a viable product.”
Nex Regulatory Reporting is also addressing the uncertainty around Brexit and preparing for all eventualities. It has established a European trade repository in Stockholm and will open a corporate office in Amsterdam in February. “We have made preparations in advance of Brexit and have communicated our strategy to our clients and are now focusing on helping them figure out what they need to do and how they onboard new legal entities to meet all potential Brexit scenarios,” says Davies.
“We all have to get a bit smarter at ensuring we are ready and able to commit to any regulation, large or small, as they come to light,” she adds.
Technology vendors were invited to pitch their products and services in categories covering traded risk, front-office regulation, pricing and trading, buy-side technology, back office, data and other specialist areas. Candidates were required to answer a set of questions within a maximum word count about how their technology met industry needs, its differentiating factors and recent developments. A total of 176 entries were received and shortlisted.
A panel of industry experts and Risk.net editorial staff reviewed the shortlisted entries, with judges recusing themselves from categories or entries where they had a conflict of interest or no direct experience. The judges scored and commented on the shortlisted entrants. The majority of the judges met to review the scores and, after robust discussion, made final decisions on the winners. Where there was no credible winning candidate, a category was scrapped.
Sid Dash, research director, Chartis Research
Clive Davidson, contributor, Risk.net
Ian Green, chief executive officer, eCo Financial Technology
Fred Gentzel, co-president and chief operating officer, Capula Investment Management
Jenny Knott, chief executive officer, FinTech Strategic Advisors
Simon Lumsdon, head of technology, Hermes Investment Management
Ray O’Brien, global risk chief operating officer and head of global risk analytics, HSBC
Hugh Stewart, research director, Chartis Research
James Turck, CIB IT, BNP Paribas
Tom Wilson, chief risk officer, Allianz
Duncan Wood, editor-in-chief, Risk.net