Buy-side market risk management product of the year: Imagine Software

When Societe Generale Prime Services was looking for a platform to replace the combination of systems it was using for intra- and end-of-day risk and margin calculations it turned to Imagine Software.

The company’s track record in providing real-time portfolio management, risk and regulatory solutions for more than 20 years, either installed or as a cloud-based service, helped convince the broker that it was the right partner to create a solution to match the scale and scope of SocGen’s business and also meet regulatory needs for real-time margining, reconciliations, margin calls and collateral sweeps.

The result is the Real-Time Risk & Compliance (RRC) Solution, an integrated system to manage global risk and compliance for clients operating high-volume, high-speed operations.

Built on the foundations of the company’s Imagine Financial Platform, RRC is a flexible hosted system that can provide all key daily processing for a wide range of end-user clients, while offering prime broker firms such as SocGen full control over their operational workflow, besides tight integration with upstream and downstream systems.

Creating RRC required a re-architecture of Imagine’s risk engine. The company leveraged its existing capabilities – such as real-time analytics for Monte Carlo-based models – and through a combination of hardware, new software and mathematics, including parallelisation of calculations and grid computing, it has been able to deliver the requisite real-time performance.

It was not simply a case of optimising the risk engine, however. Providing analytics on a massive scale for a prime broker or other large organisation required Imagine to address a host of big data issues, including breadth and depth of instrument coverage, openness, transparency and operations control.

The system needed to support all types of securities, including specialised commodities contracts, such as spread futures, which require the generation of synthetic time series that must be maintained. Imagine was able to exploit the automated processes it already had to augment and maintain its global security master, which now covers nearly seven million securities and more than 150 asset types.

In addition, it had to ensure every security had a mathematical model to provide the required risk analytics – such as sensitivities to inputs, stress-test results and Monte Carlo simulation results – and was fed with robust inputs, including interest rates, underlying prices and volatilities.

The need for clean historical data has become a critical dependency for risk management as many required risk measurements include historical value-at-risk, as well as the ability to replay historical scenarios

Lance Smith, Imagine Software

To handle bespoke over-the-counter products that are unavailable in Imagine’s library, RRC allows users to write ‘apps’, such as stress tests, for themselves using Imagine’s risk analytics and datasets, or incorporate their own models.

“Buy-side firms are now trading a wider range of instruments than before,” says Lance Smith, chief executive officer of Imagine Software. “In Asia, especially, there has been rapid growth in the exotic derivatives market. New exotic derivatives continue to come to market, so that if a firm is to participate, it must continually expand its risk management capabilities.”

For transparency, Imagine documents all of its models such that they can be reproduced in a spreadsheet to several decimal places; in some cases as many as eight. It also provides automated checks to detect and correct erroneous data.

“The need for clean historical data has become a critical dependency for risk management as many required risk measurements include historical value-at-risk (VaR), as well as the ability to replay historical scenarios. These types of analyses tend to zero in on bad data, which, if not rectified, will completely obscure the results and render them meaningless,” says Smith.

Operations console

Imagine also built an operations console for managing client-contributed data, such as position marks and reconciled trades. The console monitors the status of input processes, summarises the information in various ways for easy interpretation, with the summaries expandable so risk managers can investigate problems and find solutions.

‘Trouble’ accounts, which are in breach or close to breaching limits and may require intervention, are highlighted. Interactive tools, such as slicing-and-dicing and special risk views, such as key rate duration and Vega by percentage strike, are available to help isolate problems.

SocGen is now operating RRC as a single, fully integrated system live in Hong Kong, as well as in New York and London – monitoring client exposures as new trades stream in and market prices update for upwards of 10 million trades per day and in bursts of more than 24,000 trades per minute. The system supports end-of-day and intra-day needs, and supplies all the risk data required to calculate client margin on tighter timelines than were previously possible.

SocGen says RRC has met its need for consistency between intra-day and end-of-day profit-and-loss and risk metrics across all asset classes, with the system able to instantly update VaR, price sensitivities, threshold alerts and other measures every time futures are cleared, or equities or portfolio swaps are traded.

“Asian risk management requirements are approaching those of Europe and North America,” says Smith. “Imagine provides everything that the most stringent user could need, such as VaR and configurable stress tests. RRC also supports the exotic derivatives in the region’s marketplace, including double-barrier options, accumulators, and a raft of volatility derivatives such as variance/volatility swaps and corridor/cross-corridor variance swaps.”

An Asia Risk judge says: “Imagine has successfully provided systems and managed services for equity derivatives trading and life-cycle management, and buy-side, prime services, custodian and securities services for more than 20 years. It has been able to fund and launch new replacement technical, analytic and data architectures. SocGen Prime Services, with all its buy-side clients and outsourced service provision, has presented Imagine with the right economic and scaled opportunity.”