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The Right Direction

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In this article, CSI speak to Rohan Douglas, CEO of Quantifi, regarding how Quantifi operates and also engage in discussions around market challenges and developments.

 

Q: How do you differentiate yourself from your competitors?

A: One differentiating factor is that our technology infrastructure was built from the ground up. Whereas other vendors may offer, for example, add-on scenario analysis functions, we can produce faster results because it has always been an integral part of the risk engine. Equally, our analytics library was built on a .Net platform, so performance has always been a key element of the product. Another differentiator is that we bring on board experienced people from the industry, so we better understand the nature of our clients' needs.

Q: Which challenges/opportunities does the current environment bring to your business and how do you intend to manage them?

A: The challenges affecting the OTC derivatives and credit markets more broadly are creating opportunities for Quantifi. In particular, the credit crisis demonstrated that, in certain cases, older legacy risk management models didn't perform as needed or expected. In addition, regulatory changes are having a structural effect on the market.

The overall impact of these challenges will remain uncertain until the final regulatory picture is resolved. However, institutions are already readjusting their priorities in expectation of the need for greater reporting.

The general direction and focus of regulatory efforts is clear: the intention is to introduce CCPs and begin clearing a growing area of the OTC derivatives market, as well as increase regulatory reporting. The market is heading in the right direction with regulation, but the slightest change in focus further down the line can have a huge impact. The more complex the regulation, the more likely it is that unintended consequences could occur.

Historically, the CDS market has been dominated by big banks, and it is hard to predict how the opening of the market to new participants will impact the landscape. The concern for some on the buy-side is that the regulatory changes will increase the cost of trading CDS, but I'm not so convinced about this argument. The tying together of all the different pieces involved in using a CCP will be a challenge for most players, especially in an environment where there are cost constraints.

The CDS market has traditionally been quite competitive, with aggressive bid/offer spreads and plenty of liquidity. I'm not sure what the net effect will be if banks are no longer so motivated to provide liquidity. However, if you look at the development of other derivative asset classes, there is a good case to be made around the positive benefits of clearing in terms of liquidity and market size.

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