Infinity’s Landed Gentry
By Nina Mehta
What do you do after you’ve climbed to the top of the derivatives software business? Roger Lang and Till Guldimann, the chairman and vice chairman, respectively, of Infinity, a SunGard company, have been wrestling with that problem and have reached similar solutions.
Lang has followed in the tracks of Hollywood stars by purchasing a ranch in Montana. But his reasons have less to do with privacy than with protecting the Yellowstone-area ecological system.
He bought the cattle ranch in Montana a year ago and now has more than 3,000 head of Red Angus and Black Angus cattle—mostly steers and heifers that are sold for beef. But across his land roam elk, pronghorn (North American antelope), two brands of deer, bison, moose, wolves and both species of bear—the grizzly and the black bear. Lang isn’t in love with cattle-ranching per se. His goal, instead, is to create an example of a sustainable cattle ranch that can make money and, at the same time, meet the needs of wildlife biology management.
His ranch is a large (he won’t say how large) contiguous-space swath of land close to Yellowstone Park. Wild animals don’t obey boundaries, he says, and once in open lands “are subject to a grueling life—hunters, cars, developments, subdivision fences.” One benefit of his ranch is that there are natural corridors between it and Yellowstone Park, so migratory animals can come and go freely. He is committed to keeping his land intact—rather than subdividing it—and to not overgrazing it with cattle, since that would compromise the diet of the migratory animals that winter on his property and would eventually lead to soil erosion. Lang also wants to protect the wide-open spaces that define the Rocky Mountains and the West, and that are part of “this country’s national heritage.”
Lang frequently spends long weekends at the ranch, which is run and managed by professional ranchers, helping with daily operations like branding and roping cattle. As far as the financial community goes, he says, “We have to start thinking philanthropically and ecologically. We have one biosphere, one planet to live on. And the people who’ve been most successful economically can be the ones who are most influential in these other areas in the future.”
Till Guldimann doesn’t own a ranch. But when he and his wife moved out West from New York two-and-a-half years ago, they bought an old goat farm in Saratoga, Calif., part of which they converted into a vineyard with the help of a vintner.
Guldimann is not yet serving up the fruits of this experiment. It takes three to five years to grow vines that produce usuable grapes, he points out, “so we are still in the dreaming stage.” In the meantime, he tools around on his tractor—“big toys for big boys,” he explains. He and his wife are growing a cabernet “derivative,” but he can’t recall which one. They haven’t yet decided whether to have the wine bottled under the “Guldi” label or sell the harvests to a winery in the area. Then again, he adds, “If it isn’t good enough for drinking, we can always bring it to parties.”
Despite their weekend passions, Guldimann and Lang haven’t yet made plans to give up their day jobs.
Three New Credit Enhancements
By Andrew Webb
Now that credit risk management has become a fixture in comprehensive risk management software packages, everyone seems to have it. The question is: Who does it best, and for whom?
In the last few months, three leading vendors have added new credit management functionality to their existing systems. In October, Summit Systems announced it was adding credit derivative instruments to the system’s basic set of front-, middle- and back-office coverage. The announcement followed Panorama’s introduction of new credit risk management functionality in SunGard’s Panorama product, and C-ATS’s new enhancements to the credit-oriented analytics in CARMA.
Just two years ago, integrated credit and market risk management (not to mention most of the credit derivatives market) was all theory and no practice. Only a few market leaders—such as LOR/Geske Bok and later C-ATS—spent considerable research and development dollars on unraveling the complexities of credit exposure calculations and even credit value-at-risk. Since then, however, the market climate has changed dramatically. Advances in credit analytics and greater market awareness have made credit risk management a high priority for risk managers.
Many financial institutions are looking into creative ways to optimize regulator-mandated credit-risk capital allocations. Often, this process involves structuring credit exposure limits to allow for the most favorable allocation of capital vis-à-vis regulatory requirements. Moreover, financial institutions are using credit derivatives more frequently to manage portfolio-wide credit risk. These trends have fueled end users’ appetites for credit limits and risk management systems, as well as front-office coverage for credit derivatives.
What follows is a description of C-ATS’s CARMA, Summit’s Credit Risk Engine and Infinity’s Panorama, given their recent announcements of enhanced credit capabilities. It is important to remember, however, that Algorithmics’ RiskWatch, Infinity’s Credit Simulator and the RiskMetrics Group’s Credit Manager are also major contenders in the credit arena.
Target Market: CARMA is an enterprise-wide risk management system that closely integrates credit and market risk management. It targets mid-sized to large financial institutions that are looking for an “industrial strength” risk management solution capable of delivering near-real-time risk measures, such as market VAR, credit exposures and even credit VAR, applied to extremely large portfolios.
Background: CARMA, which C-ATS began to manage in 1996 after the firm acquired LOR/Geske Bok, provided integrated credit and market risk management long before they became fashionable. In fact, one of CARMA’s first and most successful markets has been derivatives companies’ special purpose vehicles (SPVs), which are incorporated to facilitate securitization. Typically, these companies hold a pool of diversified collateral, which is used to back several tranches of investment- and non-investment-grade notes. This collateral must be monitored continuously to ensure that its overall level of credit risk continues to support investment-grade notes. CARMA’s credit VAR and exposure analysis, both of which are based on multistep Monte Carlo simulations, provide valuable information on pools of collateral, which may include nonlinear P&L distributions.
Indeed, CARMA has long been the market leader in the SPV category, with both Standard & Poor’s and Moody’s authorizing the use of its analytics to help rate securities to be issued by SPVs and other offshore entities, by carefully analyzing the credit risk associated with the underlying portfolio of collateral. Previously, the most prevalent criticism of the CARMA system was that it was developed by quants who couldn’t build a reasonable user interface. Lately, however, the CARMA user interface has received a facelift, and CARMA 3.0, in particular, is said to provide better reporting and more user-friendly configuration screens.
Latest Credit Capabilities: Now that CARMA has competition in the integrated credit risk management realm, C-ATS has been working hard to address user-friendliness concerns and to keep its functionality ahead of the curve. In particular, C-ATS now offers a flexible limits-management utility that allows managers to view credit and market exposure limits according to numerous user-defined parameters. This feature also lets users dynamically compare limits utilization with credit and market risk measures, and reallocate limits on-line. The latest version of CARMA also includes a credit model extension that provides actual credit exposure and risk reports along with gross credit (that is, never netted) and net credit (always netted) reports, allowing users to quantify the effects of netting agreements on enterprise-wide credit risk.
CARMA’s credit exposure and credit VAR methodologies are well established in the market, and they are known to be particularly accurate. CARMA does not use controversial portfolio techniques to speed up Monte Carlo simulations that underlie its credit analytics; instead, the software has been engineered for speed, and CARMA has been clocked by an independent consulting organization at 1.7 valuations per minute. CARMA version 3.0 also includes a revamped report viewer and numerous “usability” enhancements.
System: Summit Credit Risk Engine
Target Market: Summit provides front-, middle- and back-office functionality to trading organizations. The company is particularly well-known as a leader in the interest rate derivatives arena.
Background: Summit has its roots in front-office trading, and the firm has pursued a development strategy designed to extend its front-office strengths into an accessible, integrated middle- and back-office environment. So far, Summit’s biggest strength remains its front-office capabilities, although its risk management analytics are catching up and developing a following, particularly at the trading-desk level. Indeed, over the past several years, Summit has proven its ability to develop new functionality and seamlessly incorporate it within existing modules. Perhaps this ability is a result of the company’s development strategy, which has emphasized open systems features such as flexible application program interfaces and compliance with COM, DCOM and CORBA standards.
Earlier this year, Summit released a credit risk API, which allows users to access their own proprietary credit-exposure analytics through the Summit system. Summit is also compatible with Standard & Poor’s CreditPro data, which include default and recovery rates for numerous securities. This was an important step toward integrating credit and market risk management within the Summit system, which has rapidly become a prerequisite for risk management systems buyers. Summit also includes credit-limit-management capabilities, allowing traders and managers to monitor and reallocate credit limits dynamically.
Latest Credit Capabilities: Summit’s latest offering in the credit arena is in keeping with the firm’s commitment to offering the latest front-office bells and whistles. Credit swaps, credit-linked note structures and high-yield bonds will now be available throughout the Summit system, from the front to back office. Summit will incorporate a generalized form of the Jarrow-Turnbull model, which allows users to define a term structure for default probabilities and recovery rates. This model, expected to be available from the first quarter of next year, incorporates correlations between interest and default rates, and is perhaps the only commercially available, nonproprietary valuation model for credit derivatives. Also planned for the release of first quarter of 1999 is additional coverage that includes total return swaps for bond portfolios.
Summit now provides top-notch front-office functionality, as well as middle- and back-office features. For trading desks that want to incorporate credit derivatives straight out of the box—and for trading desks that do substantial volume in credit derivatives—Summit’s new functionality is a definite plus.
Infinity, a SunGard company
System: Panorama 98.1
Target Market: Panorama provides integrated front- and middle-office functionality. When combined with Infinity’s Devon system, Panorama offers straight-through front-to-back-office processing.
Background: Panorama was originally developed to provide instant risk management functionality out of the box. Indeed, the system first developed a following by virtue of its easy-to-use Windows graphical user interface and its rapid implementations, aided by a proprietary data mapping tool and a comprehensive data model, which together facilitate the development of a risk management data source. Since Panorama’s inception, the scope of the system’s functionality has considerably broadened.
Currently, Panorama is billed as a front- and-middle-office system. As Summit began building risk management functionality onto its highly developed front office, Panorama’s development team began creating front-office functionality to go with Panorama’s highly developed risk management module. So far, Panorama’s middle office is still popularly perceived to be stronger than Summit’s middle office, and vice versa for the front office. As a provider of straight-through processing, however, Panorama may have an advantage through its affiliation with SunGard. Recently, a number of banks have successfully integrated the Panorama module with Infinity’s Devon back-office module.
Latest Credit Capabilities: This year, Panorama has extended its out-of-the-box risk management functionality to include integrated market and credit risk. Panorama is capable of incorporating complex netting agreements into credit-exposure calculations generated through Monte Carlo simulations. Panorama lets traders and managers view credit exposure limits on an intraday basis, and approved users can dynamically reallocate limits to allow the optimal use of capital. Intraday credit reports available through Panorama include replacement cost, potential future exposure, counterparty risk, net replacement cost, net counterparty risk, gross notional and net notional.
Panorama does not include credit VAR. Users who wish to add credit derivatives to Panorama’s front- and middle-office analyses, however, can do this through Panorama’s COM-compatible open system, which allows for the easy blending of proprietary modules developed in Visual Basic or C++, as well as spreadsheet-based transactions and valuation models, with existing front- and middle-office functionality.
Panorama is a targeted solution that includes robust credit and market risk management out of the box. Even with enhanced functionality, Panorama implementations tend to be quite rapid. The system’s data-mapping tool and data model have been extended to accommodate credit-risk-related data. Moreover, credit derivatives can, without too much effort, be brought into the Panorama environment.
New Products And Releases
Infinity has announced a “model partner” program designed to facilitate the integration of popular third-party valuation and analytics modules with Infinity software, such as Infinity 7.0 and Panorama. Initial model partners include Financial Engineering Associates, Monis, Savvysoft and Optional Knowledge. The model partner program encompasses both a development and marketing partnership between Infinity and participating vendors. For Infinity clients, this program means even easier access to best-of-breed analytic and valuation models. Model Partners are more interested in accessing Infinity’s large customer base.
Closing the straight-through Processing loop
Infinity has introduced a module, called the message manager, that enables Infinity applications to automatically generate SWIFT-formatted confirmation messages. This functionality, while seemingly basic, will be a boon to financial institutions that use Infinity Solutions for back-office operations. Rather than having to interface their back-office systems with a special SWIFT-formatting program to obtain confirmations, back offices using Infinity’s message manager will receive SWIFT-compatible confirmation files direct from their Infinity back-office system.
More on NT
NT is fast becoming a standard for financial trading and risk management systems platforms. Lombard has jumped on the bandwagon with the release of Oberon 5, developed for the Microsoft Windows NT system. Oberon 5 includes front-through-back-office processing for interest rate and foreign exchange derivatives. It replaces two modules: the Oberon 1.4 trading application and the Oberon CAD/VAR System. Lombard hopes consolidating these two products—and making them available for the Windows NT platform—will make them more competitive against such competitors as Infinity, C-ATS, Summit and others.
Globex2 goes live
Although the Chicago Mercantile Exchange is one of the last exchanges to maintain an ongoing commitment to open outcry, it also seems to be keeping its commitment to technology up to speed. Globex2, the latest version of six-year-old Globex, CME’s after-hours electronic trading system, has gone live. Many of the enhancements to the system came from a third-party French trading platform, which provides the technology backbone for systems used Matif, Monep and Societe des Bourses Francaises (SBF). Globex2 will be compatible with Microsoft’s dynamic data exchange protocol, which enables users to export data from Microsoft Excel in real time. It will also link to third-party trading systems. While spreadsheet connectivity will certainly be convenient for a large population of Globex2’s users, it also underscores the growing importance of NT and Microsoft desktop products to the trading organization.
Big meets small
Unysis Corp., a major hardware vendor that has moved aggressively into the IT solutions arena, will partner with Kamakura Corp. to offer the Kamakura Risk Manager (KRM) suite of products to its clients. KRM’s modules provide comprehensive, portfolio-level risk management, valuation and asset-liability management functions. Specific modules, designed for à la carte implementation, include KRM-yc for yield curve and bond smoothing; KRM-mv, a multicurrency option-adjusted mark-to-market risk management engine; KRM-dc, for term-structure-based valuation of non-maturity deposits and credit card loans; KRM-ni for stochastic income simulation; and KRM-var, for full multicurrency option-adjusted VAR analysis. KRM’s analytics incorporate the latest financial modeling techniques from Cornell’s Robert Jarrow. Kamakura’s relationship with industry behemoth Unysis, which has more than 33,000 employees in more than 100 countries, should breathe new life into KRM, a product that, while known for its robust analytic functionality, has not been effectively brought to market on a large scale.
FAME updates gateway
The latest version of FAME’s relational gateway, a tool that facilitates the communication of historical time-series data to relational applications, has been updated to improve speed. This upgrade is important to the many FAME clients that run systems on a relational data platform but want to integrate data stored in time-series formats with data stored in relational formats when running analytic applications.
|Who Bought What?
|United Mizrahi Bank
||Tel Aviv-based United Mizrahi Bank chose FENICS Analysis to provide portfolio analytics and sensitivities, as well as foreign exchange option pricing.
|Bank Handlowy w Warszawie (BHW)
||Warsaw-based BHW chose FENICS Toolkit to provide straight-through processing for the bank’s foreign exchange option-pricing operations.
||ZAI*NET Energy System
||Philadelphia-based PP&L, an electric utility, has chosen the ZAI*NET Energy System to provide trading and risk management functionality for its wholesale energy division.
|The Principia Analytic System
||Cleveland-based National City, a commercial bank, will use the Principia Analytic System to provide front-office and integrated credit and market risk management functionality.
||South Africa-based Fulcrum Bank chose Brady’s Trinity system to provide front-office functionality for its interest rate and foreign exchange derivatives operations.
|African Merchant Bank (AMB)
||South Africa-based AMB extended its Panorama and Devon systems platform to enable automatic payment and confirmation notices via SWIFT.
||Hydro Quebec, the world’s seventh-largest electric utility, chose Infinity’s Panorama to provide risk management for its treasury organization. The system will first cover interest rate transactions and will later be extended to include commodities.
|Taiyo Mutual Life Insurance
||CARMA, Catalyst System
||Japan-based Taiyo Mutual Life Insurance selected the Catalyst System to provide trading functionality and CARMA to provide risk management for the firm’s foreign exchange, interest rate and equities books.
||RiskWatch, RiskMapper, RiskWarehouse
||Tel Aviv-based Bank Hapoalim chose Algorithmics’ RiskWatch suite of products to provide comprehensive risk management functionality to meet regulatory requirements.
|Central & Southwest
||Financial Engineering Associates
||Central & Southwest, a Houston-based utility, has chosen FEA’s Outlook to provide enterprise risk management for its interest rate, foreign exchange and commodity transactions.
|African Merchant Bank (AMB)
||FENICS Pricing, FENICS Analysis and FENICS Toolkit
||ABM selected FENICS Pricing, FENICS Analysis and FENICS Toolkit to provide foreign exchange option pricing, portfolio analytics and back-office connectivity.
|Oesterreichische Kontrollbank Aktiengesellschaft (OKA)
||OKA, Austria’s export finance agency, chose CARMA to provide integrated credit and market risk management at the counterparty level.
||Oracle Financials, Oracle Database Server
||Sumitomo chose Oracle’s products to provide enterprise-wide multicurrency accounting, financial planning and profitability analysis.
||Tools Xpress, Tree Xpress
||Deutsche Bank selected Tools Xpress and Tree Xpress to provide analytics for the bank’s foreign exchange group’s research and development efforts.
|Den Danske Bank
||Simular Risk Management System
||Den Danske Bank chose FSD’s Simular Risk Management System to enable comprehensive risk management in its London treasury office.
||MINT Communications Systems
||ABN Amro selected MINT to provide integrated middleware functionality to support the ongoing growth of the bank’s global fixed-income systems platform.
|Eastern Power and Energy Trading (EPET)
||ZAI*NET Energy System
||EPET, the trading arm of U.K.-based utility The Eastern Group, chose the ZAI*NET System to provide global straight-through processing for global energy trading operations.
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