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Valuation and Risk Technology: Build, Buy—or Both?
By Rob Garfield | December 9, 2015

Tech leaders at financial organizations often grapple with the decision of whether to build new risk systems in-house from the ground up, or turn to vendors with off-the-shelf products that meet their needs. Still other firms are addressing their business requirements with a modified approach whereby they develop their own custom applications using tools and analytics provided by a trusted third-party. In fact, many buy-and sell-side firms are drawn to this combined approach for delivering functionality because it allows them to exercise control over the development and quality of their technology, while reducing the time it would take IT to devise applications completely from scratch.

The build versus buy question was one that a client of ours, a leading investment bank, recently faced when it identified a need to add new risk and valuation functionality. Specifically, the firm was encountering coverage gaps in their existing pricing system, particularly around valuing FX exotics. Additionally, staff were unable to run risk scenarios on credit positions including CDX, CDS, iTraxx and individual tranches. The bank’s existing system was unable to bridge these important gaps.

Upon assessing their situation, the bank’s management saw two viable options for moving forward. One would be to continue using their existing risk system, but this could only be done with substantial in-house development effort. Another option would be to build a new risk management solution using a specialized vendor’s risk analytics software as the foundation. Ultimately, the firm selected the second option—to build a custom solution using FINCAD technology. This approach was not only more cost effective, but the new solution would increase their flexibility, enable faster model building and help provide real-time risk data.

Financial organizations will typically have common concerns as they move to new vendor technology. Considerations such as how the technology will integrate with systems already in place, how to ensure a swift and seamless implementation and how to get IT up to speed quickly are often chief among these. To ease the transition, many firms will utilize their technology provider’s professional services support team. Ideally, this scenario helps firms deploy faster and maximize the value of their technology investment.

This is precisely the decision that our client made in order to achieve a quick and successful implementation. FINCAD Professional Services worked closely with the bank as it built out its custom risk management solution, providing developers with relevant training and technical guidance. As a result, the firm was able to complete the delivery of its real-time risk management solution ahead of schedule. It has also been able to fill the outstanding gaps, including obtaining coverage for additional credit instruments and the ability to value FX exotics—all while realizing cost savings in the process.

“As far as our bottom line results, a major benefit has been an annual reduction in costs of $150,000. FINCAD allows us to run the same models through any third-party risk system without needing to use an additional off-the-shelf product that may not run our credit models exactly how we want them to run. With FINCAD, we are now able to build customized credit models that meet our exact requirements, and this has proven invaluable to our business,” said the Head of Risk Technology at the bank.   

To learn more about this client’s experience with FINCAD, read the full case study, Leading Investment Bank Delivers Custom Risk Solution Using F3.