The Global Financial services industry is eagerly waiting to get to the land of the rising sun for what promises to be an eventful week at SIBOS, the leading annual industry conference organized by Swift. As you may have read from Colin’s introductory blog here, Microsoft has a strong lineup of solutions at SIBOS 2012. To provide further insight, I invited James J Jockle, SVP Marketing, Numerix, a strategic partner with Microsoft in Capital Markets to share some his thoughts on the industry landscape and Numerix value proposition.

Jim, thank you for taking some time talk with me today – In these unprecedented times for our industry, what are the key trends and client challenges that Numerix is witnessing?

Historically, when you think about the SWIFT community, the themes that first come to mind are connectivity and interoperability. The OTC derivatives market  has been particularly marred by these challenges.   For many derivatives market participants, connectivity and interoperability for trading, clearing, pricing, valuation and risk management is not just an industry challenge (e.g. connecting to SEFs, CCPs and trade repositories), but an internal challenge.

At the crux of the issue is the marriage of market and credit risk.  Traditionally these risk factors have been managed separately for many reasons – namely, large highly rated counterparties rarely defaulted.  Additionally, embedding counterparty risk inputs into the valuation and risk management process exceeded many institutions’ capabilities; from the quantitative finance  innovations required to capture and calculate the required risk measures,  to the compute power needed to run these calculations fast enough and frequently enough to have a business impact.

So what’s changed? Namely regulations, such as Basel III and Dodd Frank, now mandate derivatives market participants assess and manage risk from a holistic view.  Moreover, the markets and technology have evolved to enable firms to actually implement these regulatory-required changes effectively.  However any evolution (or revolution as some see it) is not without significant debate.

The biggest challenges?  A laundry list of three letter acronyms – CVA, DVA, FVA, EVA, PFE.

What are our clients doing to overcome these challenges?

When you listen to the ongoing debates surrounding derivatives counterparty risk management, it’s easy to get lost in the weeds. But regardless where the debates go, the cost of capital, funding and collateral management are top of mind for our clients.  Clients must ensure each desk has the information they need, when they need it, and management has a holistic view of its trading operations risk profile. Risk calculations are also not additive. In order to report and hedge counterparty risk, all risk calculations have to occur in a single environment.

This is not a problem Numerix can solve on its own.  To be successful, it is a relationship across our clients’ operations - executive management, trading, risk, compliance and IT - our quantitative development team, and partners like Microsoft to bring the best of breed solutions together into an existing ecosystem.

What are the client benefits that a Numerix solution offers?

Simply put - standardization. Numerix is an analytics software company. At our core is the development of pricing and risk models institutions rely on to construct, value, and calibrate all derivative types – from exchange traded derivatives to bespoke exotic and structured products.   We enable our clients to achieve model consistency for the valuation of their derivatives portfolios and give them the ability to leverage the same underlying models to get holistic views of their risk profiles.

Without this level of risk aggregation, banks potentially leave themselves significant exposed. This can manifest in many ways: higher capital reserves, unrealized exposures leading to trading losses, or a significant increase in funding for collateral management;  potentially putting the organization at a competitive disadvantage to their peers in terms of instrument pricing.

What solutions are you showcasing at Sibos in Osaka and where can clients meet with you?

At SIBOS, we will be showcasing our risk analytics from Numerix CrossAsset – our single analytic engine - with burst to Azure capabilities and SQL Server visualization.  We’ll show how trade and counterparty data remains on premises while the calculations are run on Azure.  This powers trade valuation interoperability – so whether you’re using a Numerix solution or Numerix-powered partner solution, you’ll always get the same answer.

Some clients use this capability for front office trading when grid capacity is taxed due to market volatility and their traders require real-time information on their positions. Other institutions utilize Numerix solutions via Azure to compress their nightly valuation runs down to hours.

SIBOS attendees can meet with us and see a live demonstration in Microsoft’s Booth #ID03,
directly across from the SWIFT booth.

Also we would like to invite you to our Open theatre session on "Managing Risk in the New
Normal" 11.30 AM on Oct 31st at Open Theatre 2 at the Sibos Exhibition area.

Jim, many thanks for your partnership and your time today, and I look forward to seeing you in Osaka!