TABB Group principal and senior analyst Paul Rowady invited Avadhut Naik, Product Manager, Quantifi to discuss desiloing and defragmentation; primarily aimed at large, complex dealing banks and financial intermediaries on the sell-side
"We see firms wanting to have the ability to be multi-asset, to manage their risk at a multi-asset
level. We see the need for an integrated solution that will give you a holistic picture of the risk
across multiple-asset classes and in general the sophistication of the analytics."
Paul Rowady (PR): I had always thought that desiloising meant breaking down all those silos of business activity and risk and making them all work together much more seamlessly and on an enterprise level. However, maybe some of those silos are just going to be jettisoned from the sell-side to the buy-side. What do you see in terms of the nature of portfolios and certain kinds of risk that may be moving from the sell-side to the buy-side?
Avadhut Naik (AN): We do come across this as this is one of the aspects largely impacted by Regulation and regulatory directives on the buy-side. We see this typically for books, for example correlation books for which there is a huge regulatory capital charge the sell-side needs to take to hold onto that book. Therefore the sell-side is interested in removing that risk off their balance sheet and that is where there are firms in the buy-side, which are looking for a higher return in a low interest environment. That’s where some of those trades are happening, where there is risk shifting from the sell-side to the buy-side.
PR: In terms of the toolkit, that say yesterday’s buy-side player that might want to contemplate absorbing some of those risks. Tell me about the toolkit, yesterday’s toolkit, the toolkit they need, the platform they need, in order to assess this expanding spectrum of risk that they’ve never had to try and manage before.
AN: Yesterday’s buy-side firms were focused on a limited number of asset classes and a limited number of strategies. We see that changing. We see firms wanting to have the ability to be multi-asset, to manage their risk at a multi-asset level. We see the need for an integrated solution that will give you a holistic picture of the risk across multiple-asset classes and in general the sophistication of the analytics.
PR: In terms of newer entrants, I would think that the message is that your risk platform needs to be much more holistic in nature in terms of its ability to net out risk, to look at both market and credit and the cross-pollination where the new opportunities may be. What are your views about that as a hypothesis for when you start out you still need to have this more holistic functionality.
"They don’t want the extra overhead of managing multiple systems - with
portfolio managers having their own analytic systems and risk managers and
operations having separate trade and risk management systems."
AN: Yes that’s a very interesting point. What we are seeing is the funds that are newly starting up, the new buy-side firms, are looking for what we like to call a next generation of portfolio management tools that covers the analytics, the trading and the Risk Management piece. In risk management, it is more enterprise risk management, so a tool that will that will address Market Risk, Credit Risk and liquidity risk together. As far as trading goes, they are looking for pre-trade analytics, something that will do pre-trade analytics, trade lifecycle management, as well as modeling, collateral, collateral management and clearing is getting very important so initial margin, variation margin modeling. In general, (they are looking for) a better analytic toolset across asset classes. A newly starting fund would look for a single solution that would provide all of this.
PR: So this isn’t just a broader spectrum of product, this is actually a broader component of the workflow, from pre-trade, so in other words, historically you’d have to bolt together several systems potentially to cover pieces of that workflow or across various products in order to achieve this functionality and you’d have to get all the back end infrastructure to cooperate with that. So you’re suggesting that it’s possible to have a much more integrated piece of functionality, platform right out of the box.
AN: Yes absolutely and that is what the buy-side firms are looking for. They don’t want the extra overhead of managing multiple systems - with portfolio managers having their own analytic systems and risk managers and operations having separate trade and Risk Management systems. Instead, they would very much like an integrated system that is easy to implement, easy to support and leads to lower total cost of ownership (TCO).
PR: Feeds into the whole more for less theme that we see these days.
AN: Yes, and most importantly provides an integrated view of P&L and risk.
"There is increasing demand for an integrated solution that
can provide a holistic picture of risk across multiple-asset classes
and in general more sophisticated analytics"
PR: I know that a lot of this is still very new, but in terms of building upon even this value proposition, which access do you build on? Do you build more of the workflow in terms of maybe some of the research into signal generation or cross-product pattern recognition, maybe some quant add-ons, or is it an even further spectrum in terms of regions or products. Where do you stretch even this broad enterprise and holistic view from here looking forward?
AN: I think it’s very difficult to predict where the market will go but as long as the solution is holistic and there is flexibility in scaling it along different dimensions, I think that’s what everybody’s looking for.
PR: I want to bookmark it there. That’s a lot to digest especially when you follow the migration for how the sell-side jettisons, defragments, the risk ends up on the buy-side and that creates a whole new level of creativity and innovation about how to manage a broader spectrum - I think it is really a fascinating narrative that we seek to track quite a bit more closely moving forward.
Whitepaper and Articles
Learn more about Quantifi's Modern Open Technology
Quantifi Whitepaper: Microservices: The New Building Blocks of Financial Technology
Quantifi Whitepaper: The Buy vs. Build Dilemma
Technology Trends in Asset Management