You know changes are coming. You know they’re going to be big. What do you do while you wait?
And how do you handle it when the regulators making the changes don’t exactly know how they’re going to do it?
These questions and more were at the forefront of our recent panel discussion during Microsoft’s “Week on Wall Street.” The panel—“Implementing Changes in Derivatives Regulation”—featured top risk professionals from leading financial and technology companies to discuss how the new regulatory environment is impacting the OTC landscape.
Panelists (L-R): Mike Herskovitz (CIO, AllianceBernstein), Kevin Samborn (Dir. Risk Analytics, Sapient Global Markets), Satyam Kancharla (SVP Client Solutions Group, Numerix), Ricardo Martinez (Principal – Enterprise Risk Services, Deloitte & Touche), Sanjay Sharma (CRO Global Arbitrage & Trading, RBC Capital Markets)
From a risk management perspective, the biggest question lies not in the high-volume liquid market that makes up the vast majority of the OTC market, but in the world of bespokes and structured notes like ABS and MBS.
When you consider the complexity of something like a CDO-squared—thousands of payment streams packaged in an MBS, groups of MBS wrapped up in a CDO and sold in tranches, wrapped up again in another CDO—the task of accurately valuing a security like this is daunting. Then apply analytics to these to calculate DV01 or VaR, plus the impact of credit exposure to hundreds of counterparties.
Technology requirements for companies that trade OTC products have expanded dramatically to enable analytics that are more granular, transparent and consistent. Fortunately, the panelists indicated, the price levels to build these services are much more feasible, helping to partially offset the expense and complexity of the underlying challenges.
It is also helping that institutions are recognizing the value of using consistent models, both across asset classes and across companies.
(In a related note, our recent webinar with Microsoft on high-performance analytics showed how it was possible to implement separate testing, QA and production environments for complex, data-intensive analytics at a price point that was orders-of-magnitude lower than previous architectures.)
Are there certain types of OTC products are simply too complex to trade? The general feeling was that there are opportunities in every market, but the key is being able to understand and explain the rationale behind your valuations.
