COL0999 Risk February 7

ISSUE 7 FEBRUARY 2006

The newsletter for customers of Reuters Kondor suite of trade and RISK risk management

CONTENTS Click and Read.

Industry Trends Hints and Tips 02 From market adaptation to system transformation: 11 Can Risk Management ever be a profession? PRMIA looks financial engineering on a cross-asset basis at advancing the standards of risk management worldwide Product Spotlight Risk Events 05 Challenging the back office: Reuters success story 13 Reuters events outlook for 2006 to extend Reuters Kondor+ into a new domain Global Perspective 08 Banking in India comes of age: advanced technology drives India’s private banking sector to success 10 India gets its own version of Reuters Kondor+

01 | > Register Back Issues Industry Trends

asset business, but the technology industry recognizes that Summary From market adaptation to a strategic change is happening, necessitating new types of application. Addressing this new frontier is time consuming • New hybrid products require new system transformation and expensive, but the future of their business will depend types of application Looking at financial innovation from an IT systems perspective on the solutions they deliver. • The challenge of integrating cross-pricing offers an insight into trends that are often hard to spot from other viewpoints. Take the emergence of hybrid products, This new type of financial application will be intended to tools with a trade and risk management address two key challenges: platform which has had a knock-on effect on the software industry. Although at an early stage, it’s possible to see the first signs • Single platform software has many benefits of a major transformation in both the banking industry and • Provide a powerful “product modeller” that covers: the software products it uses. – the instrument building (which must be simple, flexible and fast) Recent economic conditions have resulted in shrinking – the pricing engine, including the models and the margins in many asset classes, leaving little room to increase numerical methods in separate building blocks and banking industry revenue. But one area with potential is to – a calibration engine with user-definable configurations expand into the cross-asset or hybrid area. Looking at of market data. financial engineering on a cross-asset basis opens the door to an almost-unlimited world of innovation and offers a The three of them should be independent processes platform for business with real longevity. ensuring that the end-user can take out a piece and replace it with the best-fit component. New products mean new applications • Aggregate into a multi-data, cross-asset trade processing The development of cross-asset products puts derivatives system that covers the entire transaction processing chain traders and product structurers in the front-line. It requires to make the trades available to front-, middle- and back- them to be equipped with new types of applications. office processes on a real-time basis and provides Technology vendors have been quick to see the consolidated data for consistent profit and loss/risk opportunities in this development, but providing systems exposure calculations across the entire trading portfolio. that can deal with these structured trades is not easy. Banks have employed tactical, stop-gap solutions to carry out cross- >>>

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The key to success is integration The challenge ahead Addressing these challenges creates a further hurdle. The The industry will have to produce single platform software current segmentation of the market for financial technology which will assemble a flexible instrument modelling tool means that vendors who tackle pricing and modelling do not within a modern end-to-end trade processing work flow. necessarily have the capability to tackle end-to-end The expected benefits are: transaction processing. • Make the existing set of market data available to product Instrument modelling has been driven by providers of analytics structurers, enabling any combination of financial asset who were typically the first third-party vendor to deliver best- to be viewed in terms of price, volatility and correlation in-class pricing functions. But the market now requires a tool in real time. that allows traders or quants to design on-the-fly payout structures with high-flexibility and intuitive programming • Aggregate them in a global trade repository system, within a building-block approach. These analytical products enabling the bank to create a synthetic and up-to-date almost meet the needs of cross-asset products, but a key P&L result on a global scale with cash, derivatives and weakness is a lack of proper correlation models. hybrids consolidated altogether.

The main challenge remains the integration of cross-product • Use a risk management tool that automatically: pricing tools with a trade and risk management platform. – identifies the embedded exposures irrespective of the Analytics providers tried and failed to enter this business – nature of the instrument the technology environment being far more complex than – enables end-users to stress their portfolio to different they have been used to. It seems likely that we will see a market scenarios and dramatic increase in partnerships and mergers between – gives a full risk spectrum enabling banks to choose analytics providers and software vendors in response to the hedging strategies which are the most suitable for the market’s needs for comprehensive solutions. Currently, there forecasted market changes. are too many systems and too many vendors. >>>

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• Cover the entire transaction processing chain with a user- defined event-driven workflow which is quickly adaptable to any complex instrument, simplifying processes, reducing the risk of errors and hence reducing costs.

Although structured products were the main driver for this system transformation, similar trends are occurring in the cash market. This parallel evolution finds its roots in a general reconsideration of the raison dêtre of the systems. Providers finally realized that their job is to make it easier for end-users to do their business as they want, not merely as the system enables them to do.

Pascal Roy is Director of Financial Engineering with Reuters Financial Software.

This article has been provided by Financial Engineering News. To receive this free newsletter on a regular basis, please click here. ●

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Reuters Kondor+ is the new module for Treasury Summary Challenging the Back Office: Major investment has gone into porting the functionality • Reuters has launched Reuters Kondor+ Reuters success story to of Reuters KTP into a new module, Reuters Kondor+ Trade Processing. Using the same data model on a single Trade Processing 2.6, covering FX/MM extend Reuters Kondor+ technical platform we can now offer customers a front to and OTC derivatives back office solution to consolidate their treasury systems. • Reuters K+TP manages processing of into a new domain Also, there are additional benefits for customers who are moving towards cross asset class front and back transactions, confirmations, payments and Reuters Kondor Trade Processing enhanced office applications. accounting entries from a single database Reuters is committed to providing the back office with server infrastructure powerful software, compliant with market standards as they Advancing the trading room infrastructure evolve. The latest release of Reuters KTP, Version 5.0, contains • Further instruments and functional coverage In the late 1990s customers came under increasing pressure enhancements such as a new SWIFT messaging module as to undergo significant changes in their trading room as well as compatibility with Reuters Kondor+ well as more IAS 39 functionality. About 60 clients in Europe infrastructures. This was brought about by regulations such 3.0 are scheduled for 2006 and Asia were using this version by the end of 2005. Reuters as IAS 39, and the growing importance of risk within financial KTP continues to be enhanced for its 180 customers either institutions. Customers not only wanted to consolidate their as a standalone or Reuters Kondor+ integrated solution, many trading room systems, but also to create an and development of version 6.0 has started, with a targeted infrastructure that put risk at the heart of their infrastructure. delivery date towards the end of 2006. New features will address existing clients’ requests, further derivatives coverage, At the same time, Reuters Kondor+ had become the market workflow management as well as more functionality around leading position-keeping system for a bank’s treasury system, compliance, regulations (such as IFRS) and security issues. with its strength in FX/MM and cross asset class coverage for both front and middle offices.

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05 | < > RISK ISSUE 7 FEBRUARY 2006 Product Spotlight

To satisfy their need for systems consolidation, customers increasingly asked for an integrated back office solution for Reuters Kondor+. As a consequence, Reuters partnered with various back office providers. Customer feedback and our own experience taught us quickly that Cash Fixed Credit there was a vacuum in the market for a really efficient front Treasury ForEx Equities & Income Trading to back office solution. Derivatives

For this reason, Reuters acquired Diagram, a proven and market leading back office provider in France and Structured/Compound Products a partner in selling Reuters Kondor+ and a standardised interface with Diagram Capital Markets. Limits management module

Synergies between Reuters Kondor Sales Trade Access module and Diagram: FlexServer module Market Share: Over 400 clients running Standard different Diagram applications, including references adapters & KONDOR+ Import/ such as BNPP Securities Services, Credit Lyonnais and Pricing position keeping & P&L management a significant number of corporates, including most of export services the CAC40 members. Middle Office Module Cash flow analysis, portfolio evaluation, revaluation, market conformity, risk management Know-How: Immediate integration of Back Office know-how with 200 developers, financial engineers, support and consulting specialists joining Reuters. Trade Processing Module IAS 39 compliance, SWIFT messaging >>>

Reuters New Modular Product Propositions

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First Step: Fully interfacing the two best of • Modernise development tools, including Web interface – breeds solutions in line with Reuters Kondor+ Trade Access for Sales and The first steps following the acquisition of Diagram were Reuters Kondor Global Risk, thus providing a consistent to bring together development, financial engineering look and feel for the front, middle and back office. and product management teams to Reuters. Then to ensure full compatibility of Reuters Kondor+ and Reuters • Provide scalability to adapt to future market and client KTP (previously DCM) while developing a future roadmap requirements. to produce a front to back office solution. Reuters KTP has been sold to more than 70 Kondor+ clients on a • Profit from Reuters Kondor+ Open Trade to seamlessly global scale. introduce new instruments, i.e. complex derivatives and structured products from the front to the back office.

Further Steps: Develop Reuters Kondor+ Trade This project has been worked on with substantial help Processing as an extension of Reuters Kondor+ from sponsoring clients to validate the overall conception A new team was formed and a new goal was set to fully and specifications as well as to participate in Early Access integrate Back Office functionality as an extended solution Programmes (EAP) and workshops over time. The first version of Reuters Kondor+. The objectives were to meet of Reuters Kondor+ Trade Processing is currently being customer requests such as: installed with a number of pilot clients in Europe and in Asia. Reuters plans to roll out the new Trade Processing module to • Share the database server and the powerful and proven a substantial number of customers, including major Reuters Reuters Kondor+ data model with the Reuters Kondor+ Kondor+ accounts, throughout 2006. front office module for high volume trade processing. For more information contact [email protected] • Access the same financial libraries and market data. Reuters Head of Product Strategy Front to Back Office.

• Build on the technical infrastructure and APIs. More about Reuters Kondor Front to Back Trading Solution. ● • Propose a more open and more flexible workflow management.

07 | < > RISK ISSUE 7 FEBRUARY 2006 Global Perspective

Moving towards a more structured market Summary Banking in India comes of age As a result, the need for liquidity has fuelled the growth With the implementation of banking sector reforms, Indian of derivatives instruments and banks are trying to create • Advanced technology drives India’s private structures that offer greater liquidity but with proper risk banking sector to success banking has undergone a sea change in the past decade. Over the years it has become more efficient due to the mitigation features. The Over-the-Counter (OTC) derivatives market has grown to an outstanding notional amount of over • Taking the risk out of greater liquidity implementation of prudential norms for asset classification 10,000 billion rupees as at end-March 2005. • Deepening the foreign exchange market and an improved thrust on technology advancement. The public sector banks still dominate with 75% of the market The money market is the focal point for the central bank’s share of business and profits. However, new private sector operations to manage liquidity and thereby transmit banks with their technology driven business model are fast monetary policy impulses. A technical group on money catching up. The last two years has seen banks achieve markets, submitted a report in May 2005, reiterating the windfall gains in treasury profits. So, with interest rates policy should continue to encourage collateralised markets, hardening up, banks need to focus on core profit growth, develop the rupee yield curve, ensure transparency and and improve their asset mix with home loans, auto loans better price discovery, provide avenues for better risk and personal loans. management, and strengthen monetary operations.

A strong performance by the industry and various sectors, The Reserve Bank had also set up a Group on Rupee coupled with a marginal improvement in the agriculture Interest Rate Derivatives for harmonising the regulatory sector, saw the Indian economy notch up another impressive prescriptions for OTC and exchange-traded interest rate showing in the July-September quarter. The GDP grew by derivatives. The Group recommended that banks meeting 8% in the quarter ended 30 September 2005, as against 6.7% a set of requirements, including adequate internal risk in the same quarter last year. If the current momentum management, control systems and a robust operational continues in the next couple of quarters, the Indian economy framework could be allowed to run trading positions should comfortably grow by close to 8%. This makes India across various interest rate derivatives, including interest one of the fastest growing economies in the world after rate futures. China. The Reserve Bank of India (RBI) has forecast a full-year GDP growth of 7-7.5%. >>>

An Indian moneychanger Delhi, August 2005.

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Opening up the Government securities market Efforts to further deepen and broaden the Government securities market over the years have also been stepped up by the Reserve Bank India (RBI). Consequently, open market operations would become a more active policy instrument with a review of processes and technological infrastructure consistent with market advancement.

The RBI continued with its policy of freeing-up external transactions with a view to deepening the foreign exchange market. When these measures happen will depend on the enabling conditions for further progress towards capital account convertibility, liberalisation in other sectors of the economy and the trend in overall balance of payments.

In the context of high growth, the RBI has advised banks to build a framework that will allow them to build and transact in treasury products while complying with the strict disclosure norms that have been set out by the regulatory body.

For more information contact [email protected] Reuters Journalist, India.

For a more in-depth review of the Indian market click here. This article gives a much deeper insight into India and its move towards a more structured market. ●

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potential of the local market, Reuters India has developed a Summary India gets its own version of country specific version of Reuters Kondor+ with many of the regulatory and country specific requirements, based • Banks invest in Reuters Kondor+ to provide Reuters Kondor+ on market feedback from leading Indian clients. smooth trade processing and risk control Reuters has been active in the Indian trade and risk mechanisms management market since 1999 with Centurion Bank (now The very latest developments include modifications for known as The Centurion Bank of Punjab) as the first Reuters corporate foreign currency transactions, stop loss limits • Reuters India adapts Reuters Kondor+ to be and bi-lateral netting features. These increase the efficiency specific to India Kondor+ customer. Since then, Reuters Kondor+ has made its presence felt in the premier treasuries and is now seen as of the trading room and ensure a seamless trade-processing • Seamless foreign currency transactions the market leader in this area. Part of the success is due to the environment for the local currency market. early establishment and implementation of local support teams in Mumbai who service customers across India. Thanks to the feedback from Reuters clients the local Reuters team is continually enhancing the current solution The Reserve Bank of India periodically publishes guidelines to adapt to the evolving market. With complete coverage and recommendations for regulatory compliance for all banks. of local market data and the flexibility of the Reuters Kondor These include adequate internal risk management, control platform, it means there is now a proven product for Indian systems and a robust operational framework that are necessary financial institutions requiring standardised solutions to run trading positions across various instruments including plus integration with the market platforms for both FX derivatives. This has created a need for banks to invest in and Rupee business. systems that provide scalable, seamless trade processing features with comprehensive risk control mechanisms. For more information contact [email protected] Where Reuters Kondor+ comes in Reuters Market Analyst, India. It meets the regulatory requirements to support the View a demo of Reuters Kondor +. ● framework through automated straight through processing and complete market and credit risk coverage for all financial instruments including structured derivative products. To support India’s growing economy and to help realise the great

10 | < > RISK ISSUE 7 FEBRUARY 2006 Hints and Tips

Standards guaranteed Their goal continues to be that of making sure the Can risk management ever be The Professional Risk Manager (PRM) Certification is the discipline of risk management becomes respected a profession? Yes, say PRMIA leading certification program for risk managers, endorsed by as a profession. So far the strategy has been successful, top university programmes and businesses; it counts in energy, banking, insurance, alternative investments, How do you move people’s perception of risk management candidates in more than 80 countries. traditional asset management, even environmental and from simply being a discipline to that of a profession? You biological arenas. Risk management is evolving from a do it through education, communication and a focus on The PRMIA Institute was created through partnering with discipline into a profession. extending the understanding of risk to the business places leading universities around the world (see next page) in which it is created. This is why the Professional Risk and develops best practice curricula for graduate level Visit www.PRMIA.org and learn more. Managers International Association (PRMIA) was formed programmes in risk management and financial engineering. in January 2002 by the leaders in risk management. The aim is to provide employers with the surety that the >>> Dedicated to advancing the standards of risk management graduates they hire have mastered a standard level of worldwide through the free exchange of ideas, it was set knowledge. PRMIA also offers over 450 online professional up to help define what it means to be a risk professional development courses and classroom-based education in and to provide the standards, networks and resources partnership with these universities. Candidates for these necessary to gain acceptance as a profession by those who courses grew by 80% in 2005. employ or rely on us. The handbook PRMIA is a non-profit, member-led association with over PRMIA recently had great success with the publication 30,000 members from more than 165 countries, and an of the Professional Risk Manager’s Handbook: A Guide established network of local chapters in 60 cities. With to Current Theory and Best Practices. It has become the partners they provide resources to prepare, train and ‘go-to’ resource for the foundation and application of educate from the cradle to the pinnacle of a risk manager’s financial risk management services in over 105 countries, career. In the last year alone, over 225 learning and 23 of the world’s largest 25 banks, all 10 of the largest networking events were hosted by local chapter leaders. financial services companies, and as a foundation for graduate-level education at several institutions.

11 | < > RISK ISSUE 7 FEBRUARY 2006 Hints and Tips

PRMIA questions and answers

How many members in PRMIA? Over 30,000 from 167 countries.

How to join? Registration is online at www.PRMIA.org

PRM certification is endorsed by leading The National University of Singapore Centre for Financial Engineering. universities around the world including: University of Toronto Risk Lab. University of Reading ICMA Centre. Technical University of Munich – HVB-Institute for Mathematical Finance. Macquarie University Applied Finance Centre. Hong Kong University of Science and Technology Masters in Investment Management. A consortium of faculty in Paris representing ESCP-EAP, HEC, Ecole Polytechnique, Sorbonne and Universite Paris, Dauphine. Also endorsed by many of the leading firms in risk management including Reuters.

Find out more about the PRM certification http://prmia.org/INDEX/site-guide/site-guides-pd02.php

12 | < > RISK ISSUE 7 FEBRUARY 2006 Upcoming Events for 2006

2006 overview Credit Risk Summit October Reuters knows that trade and risk management London is a global concern. To reflect this Reuters will exhibit at a number of prominent industry events in 2006, where we will showcase the Kondor suite.

At each event you will have the opportunity to meet our product experts and executive team. Asia Risk Should you like to pre-book a meeting to November discuss your individual needs feel free to Hong Kong contact us. Risk Geneva ICBI ACI Global Congress December 25–27 May Risk Magazine recently ranked Reuters Geneva Manila progressively higher in their Technology ABJ Vendors survey. Review the survey. March EBIF Bangkok 14–16 November Frankfurt

Global Risk Management Summit 5–8 June SIBOS Monaco 9–13 October Sydney

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