The Finance Hive: Digital Café, 13th December
Over the last year, our members have become increasingly interested in derivatives pricing and whether there is an off-the-shelf product that can handle the entire vertical of the derivatives process—from setting up to analytics, STP, MPVs and exposure. So, ahead of the holiday period, we caught up with 22 of our most senior Fixed Income members for a buy side-only Digital Café dedicated to this very topic. It was such an insightful meeting that our Community Director, Evie Twyford has summarised and anonymised all of the brilliant member recommendations and key takeaways below…
Most of our members are working closely with their OMS providers on automated, fixed setups and default templates for different products, as well as curating and calculating custom analytics around derivatives trades. One thing they would like to understand at a glance is how the position is viewed in the portfolio, and how certain trading scenarios may impact overall portfolio positioning. For example, how would it react if you stress tested the portfolio? What is the portfolio duration impact?
It appears to many that the market has moved forward and there are now a lot of tools to invest in to help members toggle derivatives risk and have a quick view without having to build a basket or extend capital to the portfolio itself.
Members noted that various EMS providers are trying to expand into the derivatives space, but above all, it’s important for them to understand risk in portfolios to ensure members are capturing the correct data. These systems have been a popular talking point in Fixed Income for the last five years and built a good reputation, so it’s critical that they approach derivatives in the right way.
During the discussion, members agreed it would be useful to see portfolio duration impact within an EMS and place trades directly vs. sending an order from an OMS to an EMS. Trading directly from a platform to an RFQ would streamline some of the workflow.
As shared by our members, some derivatives products are so unique that streamed liquidity is not feasible and pricing of those instruments varies. Additionally, for some members, trading derivatives products happens on an ad hoc basis and transparency remains a key concern.
Our members have also expressed an interest in hearing from banks on liquidity provision and the level of flow they are actually seeing. They feel it can be difficult to assess liquidity electronically, and that in these instances, it’s advisable to speak to trusted dealers regularly to get a feel for how much is safe to trade without adverse impact.
When it comes to recommended providers, our members voiced that Calypso have the expertise to handle security setups and analytics, as well as Bloomberg, who are able to assist with full evaluation of derivatives trades. FINCAD, Citi Velocity and SuperDerivatives were also mentioned as useful, third-party applications for risk modelling.
Join Us Next Year!
We’ve added lots of in-person meetings to our 2024 calendar, including our FICC Mexico Members Meeting, Fixed Income US Members Meeting, Fixed Income UK/EU Members Meeting, and our first Capital Markets Exchange! Preparations are well underway for all of these meetings, so make sure you take a look and keep your eyes peeled for brand new digital meetings in the new year…