Aug 19, 2015

Numerix Regional Trends & Analysis: The Nordics

This video blog kicks off a new video series where we will be providing regional trends and analysis that examine derivatives pricing and risk management topics impacting specific global markets around the world. First up we have Kaare Andersen to discuss what’s driving demand for pricing and risk analytics technology throughout the Nordics region. He focuses on the role of XVA pricing and risk adjustments and the impact of the prolonged negative rate environment.

Weigh in and continue the conversation on Twitter @nxanalytics, LinkedIn, or in the comments section.

Jim Jockle (Host): Hi welcome to Numerix Video Blog. I’m your host Jim Jockle.  Today’s discussion kicks of a new series of blogs where we will be providing global territory analysis that examines derivatives, pricing, and risk management topics impacting specific regional markets. Today we have Kaare Andersen based in Helsinki, to discuss what’s driving demand and pricing in risk analytics technology throughout the entire Nordics. Kaare as we prepared for this segment, we had a really interesting discussion around XVA so I like to kind of start there and you know how is XVA being understood by the banks currently, how are banks in the region really starting to think about it?

Kaare Andersen (Guest): Banks are, of course in the process of implementing and especially the larger banks have already come pretty far, what I would call the tier 2 and regional banks are in the process of implementing and finding the right solutions. I think they see, my general impression is that they see an opportunity and not only for meeting the regulatory requirements but also for increasing profits, true optimization of their balance sheets through using the XVA numbers.

Jockle: So how, yes looking at the optimization. How is it starting to translate into the front office? Are we starting to see more of the traders engaging with these types of calculations?

Andersen: Absolutely, several banks have already introduced specific XVA desks. Definitely we are seeing focus on XVA  in these banks and they are producing the numbers or some of them are producing the numbers and looking into how they can utilize them and of course in some cases try to pass on the value adjustments to clients and trading partners.

Jockle: So you know, having been further along in terms of the implementation of and just a theoretical understanding of the calculations themselves, what have been some of the challenges in terms of implementation in the roll out, you know throughout the institutions. 

Andersen: Surely there’s still challenge there and I believe that will continue for a while as not everything is carved in stone. There’s still various methods out there being discussed and we see that these banks are trying various ways to see what they get out of it.

Jockle: Talking about the market opportunities, so clearly with the implementation of XVA, you know obviously better understanding of total cost in managing cost through the process, but also we have an interesting time in the market right now, especially throughout the Eurozone with Greece and the collective negative rate environment. What has been the impact of negative rates as it relates to the Nordics?

Andersen: Oh, negative rates have absolutely had a very big impact. We’ve seen several counterparts or several banks putting a lot of focus on how to optimize their balance sheet given the negative rates and I believe that this process is still going on unless we see short term rates and even medium term rates turning lower and lower. This process will be going on for a while.

Jockle: Now the Nordics have also traditionally been very very engaged with complex structure products. Have you seen a shift in the distribution of new product types balancing against negative rates or a pickup in demand for new innovation?

Andersen: There is no doubt the low interest rate environment has forced investors, especially on the retail side into alternative products, and utilizing structure products has increased in the last years as that has been the only way to get a decent return on investments. We see at the moment increase demand, true what I call distributors basically small boutiques, financial institutions that are distributing structured products throughout a network of private bankers to retail clients and there to, of course, increase demand for pricing capabilities of advanced structures.

Jockle: So one of the things that we’ve seen, especially you with the new regulatory regimes is starting to look at the introduction of projections as it relates to explaining different instructor products. Do you see that as a near term trend that’s continuing given the dynamic elements to the structured products within the Nordics?

Andersen: I think so and of course also we have received that regulators are getting more and more focused on how to regulate this market which is, which to a large extent is actually unregulated at the moment. Again, the regulators are focused on protecting the retail investors/the private consumers but at the moment the market is largely unregulated but I believe that we’re going to see more regulation coming in on that front simply to protect the consumers.

Jockle:  So to that end now we’re in Q3 of 2015, as you know it’s a race to the end of the year. If I’m a risk manager in the territory, what’s my priority list that I’m thinking about as we close out the year?

Andersen: I think definitely capturing the effects of negative rates; XVA is a driving force serving in risk management and in general keeping a solid balance sheet.

Jockle: Well thank you very much Kaare I really appreciate your insights into the territory and clearly as you know we will continue to see your involvement into the Eurozone, I will definitely keep an eye on structured products, the issuance change in product mix. And of course we want to talk about all of the topics that you want to talk about, so please feel free to engage with us on LinkedIn or on Twitter @nxanalytics, again I’m your host Jim Jockle, thanks for joining.

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