To improve investment performance, buy side firms are increasingly embracing multi-asset trading strategies. The problem for many firms is that their existing portfolio and risk systems cannot easily handle new asset classes and instruments. This problem limits their ability to implement new multi-asset strategies.
As a result, firms are now exploring new solutions that will give them the freedom to expand readily into new asset classes now, and the flexibility to support alternative strategies in the future.
But once you’ve decided that changes are needed, you will likely have questions regarding how to select the right portfolio and risk management solution for your needs – that is one that will support both your current and future business objectives. In our newly released Multi-Asset Trading eBook, we review some important areas to consider in your search for solutions. A summary of these considerations are as follows:
Firms need a product coverage solution that is based on a product model that is extensible easily, quickly and without code, or at least without relying on vendor development and software upgrades.
Look for a modular modeling approach based on fundamental product building blocks; where any new instrument can be constructed as a combination of these blocks. Now your solution can keep up as the market and your business changes. If designed well, the new product should integrate seamlessly with your existing solutions and interfaces.
Product and model coverage go hand in hand. Without consistent valuation throughout the book, you create ripples in reporting and introduce operational risk and manual overhead.
Valuation means more than simple price or premium. To support best execution and risk reporting you need transparency in all aspects of price, certainly CVA, and preferably other valuation adjustments. For cleared or IOSCO trades, you need an estimation of initial margin.
The market model needs to support valuation of each trade type, but it also needs to be a consistent model across asset classes, one that can produce all required cross-asset risk as well. To enable product control, look for a complete representation of market and derived data where management is possible. Integration with standard market data sources should also be available out of the box.
P&L and Risk Reporting
When it comes to reporting, first you will need utmost flexibility to replicate exactly your reporting hierarchy. It may be a simple book hierarchy, a strategy-based hierarchy or any other such as industry, rating or entity. To report effectively, you need to be able to drill down and aggregate up flexibly through different hierarchical structures of your design that enable reporting the way you need to visualize.
Today there are solutions that not only allow you to extend product coverage and valuation, but that also support risk for all products equivalently. Look for solutions that employ algorithmic differentiation (AD), the standard for fast, accurate sensitivities calculations, consistently and comprehensively across the entire product universe and not only in select asset classes.
Integration and Scalability
The best solution decisions can fail during implementation or simply not deliver the value that was expected. More often than not, this is due to how well the product can be integrated.
Out of the box trade, reference and market data that interfaces with industry standard systems is preferred, however these should be based on well documented APIs that support common interface policies and allow you or a services team to extend if you want something bespoke.
As you evaluate portfolio and risk systems, keep in mind that integration support, openness and extensibility of the system are key to deriving maximum value from the solution now and as your business changes. The core parts of your solution ecosystem, and in particular your portfolio and risk solution, should not limit your decisions moving forward.
For more information and detailed examples on this topic, download our new eBook: The Buy-Side Move to Multi-Asset Trading