Credit risk controls become paramount
The issue of credit risk under OTC clearing is putting pressure on technology providers to develop cutting edge solutions. Misys has long been aware of this and has moved quickly to enhance the capabilities within its integrated platform offering, Sophis VALUE, to support not only its buy-side, but sell-side clients.
As a result of the synergies that Misys has across its capital markets solutions such as Summit FT, Kondor+ and Sophis, its product management teams are able to work collaboratively to design and build products that cater to both buy-side and sell-side firms in response to current market challenges.
One risk-dedicated module that has resulted from this collaborative initiative is MGR Credit Risk, which helps banks and buy-side fund managers to calculate their credit risk exposures.
It includes a Limit Rules Engine that can structure almost any type of limit, as well as a scenario analysis and stress-testing engine. This allows users to simulate trades, before they are executed, to monitor the potential impact. Given that OTC clearing will involve daily margin calls, this ability to control margin limits is set to become of paramount importance.
Consequently, a recent technology enhancement that Misys has made to its MGR solution within Sophis VALUE has been to build a tool for calculating initial margin calls.
“We know from speaking to clients that they want the ability to do this ex ante in the front office system. Because this initial margin risk calculation is integrated into Sophis VALUE, it helps managers to overcome the IT burden of having to deal with OTC clearing,” explains Laurent Villiers (pictured), Risk Product Manager at Misys.
“To calculate initial margin you need to have all relevant credit definitions in place. You also need to have accurate market data to evaluate your initial margin, which could be VaR-based or stress test-based depending on the CCP.
“We effectively manage the credit risk that you need to set against your counterparties, making for more efficient workflows.”
Eleonore De Vial, a regulatory expert at Misys, adds that managers also want help understanding which trades will be clearable or not, based on CCP house rules.
“Within Sophis VALUE we aim to have the flexibility to define the rules of any particular CCP, so that when a client books a trade, depending on the nature of that trade they would have a list of eligible CCPs and clearing members to choose from. In terms of the initial margin calculation, we are currently working closely with CME and their core products to build an interface to help calculate initial margin for those products.”
As more CCPs come on board, the more effective the solution will become at supporting clients’ pre-trade margining calculations; the point being that managers will want to control their credit risk by optimising their margining requirements.
And that also extends to the number of counterparties they deal with. As Villiers goes on to explain:
“The next step is to give clients the ability to select from the best choice of counterparties. Not all hedge fund managers will want to deal with eight, 10 different counterparties, they will want to limit that number.”
“The goal will be to help clients see which prime brokers they should best be dealing with from an initial margining cost perspective,” adds De Vial.
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