This has been an extremely challenging time for the financial industry. Normal operating practices have been disrupted and organizations across the world have been forced to test their business continuity plans in anger. The economic implications of the lockdown were sharply reflected in markets, triggering wider repercussions on the industry. Recent bank earnings have shown huge spikes in loan loss provisions, despite government assistance. Fund managers have struggled to price illiquid assets and extreme volatility has cast doubts over portfolio rebalancing processes for index tracking bond funds. Recognising these difficulties, regulators have postponed major initiatives, for example, deciding to push pack implementation of Basel III by another year.
Yet through these difficult times, we have all done our best to remain optimistic. When I became chief executive of Xenomorph I knew that our software had the potential to be truly disruptive to our industry. The reasons for that are as true now as they have ever been. As a company, we have the potential to address many overarching trends facing our customers:
The need for agile data infrastructures. The financial industry is always evolving. There are always new products coming to market, not only new securities but also a myriad of different derivatives and product structures to help achieve specific risk/reward profiles. Adapting to change and supporting innovation requires agile data infrastructures that can easily incorporate new sources and structures while ensuring data quality, which is exactly what we offer our customers (as an example, see our recent paper on structured products and OTC derivatives).
Valuation control and model risk management requirements. Besides product innovation, established markets will always go through periods of change and stress. Deriving accurate prices during uncertain times can be a real challenge. Equally, existing models pricing and risk models need to be constantly monitored, tested, re-calibrated and in some cases re-thought entirely. Having valuation control processes in place, such as independent price verification, are not just a regulatory requirement, but they make common sense from a business point of view. We help address a range of requirements in this area – providing price masters for back-testing, helping to reduce reliance on spreadsheets, helping carry out IPV processes and ensuring model inputs and outputs can be validated. For more information you can also read our article on model risk management.
Evolving regulatory mandates. Both the buy-side and the sell-side of the industry are heavily regulated, and the responsibilities imposed by those regulations are always evolving. We are actively involved in developing solutions to help our customers adapt to regulatory requirements and try to stay one step ahead of new rules (for example the SEC’s proposed rule 18f-4 to restrict fund leverage and use of derivatives). We also look at how regulations in aggregate impact the way that our customers manage their data – in particular to support pricing and risk functions. In that respect, we have published recent reports that look at rules impacting the sell-side (banks) and buy-side (asset managers) of the industry.
Need for managed data services. In many cases we have found that our customers are coming to us for more than just software. They are asking us to simplify their operations by providing fully managed services. We’ve been asked to consolidate, normalize and validate data, as well derive bespoke pricing, portfolio and risk analytics, and produce management dashboards – delivering all of that as a fully managed service, which relieves them of a huge operational burden.
Without doubt, these last few months have been an extremely testing time for everyone – not only professionally but also personally. While we are by no means in the clear and there is no room for complacency, I am positive that things are turning around. I just wanted to personally thank our staff, clients and partners for their continued support and, in return, offer Xenomorph’s continued support to all of you through these challenging times.