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Asset Classes Equity and Derivatives: Product Coverage
Asset Classes Equity and Derivatives: Product Coverage
Of all the asset classes, the equity and equity derivatives class is by far the most diverse in terms of
instrument features, risk sources and trading strategies. The equity derivatives business covers a wide
range of strategies from high volume / high velocity arbitrage to high complexity structured products. Firms'
daily volumes can reach millions of executions on thousands of different names, making the management
of transactions, referential data and market data impossible without robust and highly automated systems.
On the OTC front, the equity derivatives market has witnessed a significant increase in the complexity
and creativity of derivatives instruments in the last few years - making the capture of terms and conditions,
the valuation and the lifecycle management a challenge even for the most technologically advanced firms.
To keep up with the constant innovation in products and strategies and with regulatory and accounting
practice changes, both sell side and buy side firms rely on dynamic technology solutions that can easily adapt to
change while having a low cost of ownership.
Product coverage
• Cash equity and ETFs
• Convertible bonds
• CFDs
• Stock loans
• Dividends swaps
• Gamma swaps
Fixed Income
The fixed income market has reached unprecedented levels of diversification and complexity. In order to
make the best trading and investment decisions, market participants need a technology platform with a wide
range of features and functionality.
Managing fixed income products requires large volumes of high quality information on issuers, bonds,
interest rates and credit. Real-time data import for yield curves is key. The diversity of the fixed income market
worldwide also requires the management of all types of specific local conventions.
Along with traditional markets, emerging markets in the fixed income area have risen strongly over the last
few years and most financial institutions have diversified their activity on these markets with higher risk and
potential returns. Investing in the global fixed income market means being able to manage all types of local
particularities, such as complex conventions (day count conventions, spread conventions and inflation rules
conventions). Having the right pricing and risk management tools in place is therefore crucial.
Product Coverage
• Bonds (fixed, floating, fixed to float, sinkable, callable)
• Repos
• Bond options
• IR swaps
• Asset swaps
• TRS
• Basis swaps
• Inflation–linked bonds
• Inflation derivatives
IR Derivatives
Managing IR derivatives, whether for investment management, market making, arbitrage or hedging purposes
requires a set of tools that support dealing with simple vanilla interest rates up to more exotic, hybrid and
structured products.
Financial institutions need to create, price and manage vanilla IR and simple OTC products as well as
exotic and structured products in their trading systems.
To achieve this in terms of market data users need features such as accurate yield curves that are
precisely calibrated, the ability to manage different forwarding and discounting curves and the deployment
of robust volatility management to comply with the ever-changing economic background. It also means
having the appropriate tools to manage market and credit risks.
Product Coverage
• IR swaps
• Asset swaps
• Future options
• Range accruals
• Quanto legs
• Bermudan
• Cancellable
Credit Derivatives
Credit derivatives have been at the heart of the recent financial crisis. But organisations have learned
from the turmoil and are now putting in place more reliable risk management for this activity.
It has become very clear that implementing an STP platform for derivatives is a pre-requisite as it enables
them to carry all positions with proper pricing models, have an accurate view of their risk profile across their
portfolio and maintain an efficient processing engine.
Key challenges for traders and portfolio managers in the credit derivatives space are to book all types of bonds
and credit derivatives contracts, to calibrate default curves and correlation matrices from mark to market
data; and to have the capacity to stress test these data or to run default what-if scenarios with the largest
flexibility.
Operational risk has also emerged as a key issue in the credit derivatives business especially in the case
of a massive default wave. Automated cash flow and a default event process - as well as integration with
clearing houses - guarantee to keep smooth processing even in exceptional market conditions.
Product coverage
Misys Sophis handles a wide variety of credit derivatives contracts:
• CDS
• CDX, ITRAXX
• Synthetic CDO
• Nth to default
• CDO²
• ABS/MBS
• ABCDS
• Term loans
• Revolving loans
Convertible Bonds
Convertible bonds (CBs) provide an excellent way for companies to issue relatively cheap debt
instruments, with interest rates below those offered by classic bonds. There is also a reduced cash interest
payment when CB products reach their maturity threshold. For investors, investing in CBs represents a
measured exposure to a company while benefiting from its growth if the stock performs in the future.
CBs are common products on the financial market, and are traded by all kinds of investors and institutions.
But they are complex products and one of the first hybrid products that were exchanged in the market: they
combine equity, fixed income and credit. Other features can be added to the "vanilla" CB, such as perpetual
convertible bond, issuer call, or dividend protection.
Many parameters need to be taken into account to manage these products correctly. The main challenge is
to have a precise pricing model in place.
FX Derivatives
In the mature and competitive FX derivatives market, an integrated front to back STP platform is a valuable
advantage that not only minimises cost but also keeps market, counterparty and operational risks under
control. Organisations that are coping with challenges such as growing volumes of trades, an increasing
complexity of products and the 24/7 nature of the FX business require a well-tuned trade lifecycle
management process supported by the proper technology tools.
The increase in the number of transactions and in their sophistication, the volatile market conditions as well
as an ever changing competitive and regulatory environment are reshaping the FX derivatives business
making highly automated yet flexible platforms a must.
Product Coverage
• Spot and forward FX deals
• Currency swaps
• Knock In, Double Knock In, Knock Out and Double Knock Out options
• Digital options
Commodities
One of the crucial issues facing energy traders in a volatile market place is the need to manage risk. In
addition to topics related directly to commodity trading, such as Greek monitoring and P&L explanation,
this risk includes a large number of variables to be monitored: credit risk, price risk, interest rate risk,
currency risk and others. Businesses which had previously left the majority of this work to individual desks
are now seeking to centralise their risk views and do this on a global basis. The frequency of monitoring
has also increased intensively. For this reason they need systems and tools to properly evaluate and
manage their trading, hedging activities and other businesses affected by market and commodity
exposure. These systems should be sufficiently robust to respond to the current environment and dynamic
enough to react to future changes and new requirements, as well as include automated procedures to
reduce operational risk to a minimum. Any weakness in these systems can lead to significant losses and
sometimes to financial collapse. Overall, commodity traders face a new era of risk management, and they
need the right systems to handle this. Commodity and derivatives products for oil, coal, gas, emissions,
metals, power, soft, freight and fertilisers are all managed integrally within the Misys Sophis front to back
portfolio and risk management solution. The system is designed to meet the needs of investment banks, asset
managers, hedge funds, utilities and corporates. It covers a wide range of commodity types and products, from
listed futures to exotic cross commodities derivatives.
• Gas
• Power
• Precious metals
• Freight
• Emissions
• Soft commodities
• Plastics
• Weather
Product Coverage
• Cash, futures, forwards
• Hybrid products
Securities Lending
Increased regulatory pressure, high levels of market volatility and the growing importance of cashflow
management have placed an unprecedented level of attention on the IT systems used by market
participants. Organisations need to be sure that systems they use are capable of dealing with the additional
demands put on them by the rapidly changing market environment.
Controversy surrounding unauthorised short-selling has led to institutions having to provide accurate short
selling inventories to regulators at short notice. As liquidity becomes increasingly scarce, institutions have
to become more careful and smarter in the way that positions are funded. Conditions in which securities
are borrowed today are likely to be very different in six months’ time. Institutions have realized the growing
need to be able to manage security financing in a very transparent manner
Product Coverage
• TRS (equity swap, bond swap, index swap, basket swap, portfolio swap, price swap, and dividend
swap)
• Stock loans
The structured and hybrid products market recorded an impressive growth phase over the past 10 years.
The market has seen a slowdown more recently, but the market will continue to grow as these products are
necessary to guarantee returns and hedge risk for a large scope of investors.
The financial crisis showed that many structured products were not valued correctly and risk exposure not
well explained and controlled. Because of that some investors made huge losses.
Consequently the key feature that came out strongly and that many investors now look for is transparency.
So what do financial institutions need to produce and improve transparency around structured and hybrid
products?
• More precise and frequent reporting to regulators but above all to clients and investors to show
them true value and exposure
Transparency and time to market to release new products imply an absolute necessity to put in a place the
appropriate system.