XVA solution of the year: Murex

Murex’s win of the XVA solution of the year award stems from the ability of its MX.3 management platform to define and automate flexible XVA transfer pricing workflows, across departments and throughout the trade life cycle.

“MX.3 takes a fundamentally different approach compared to most other XVA solutions out there. From the start, we designed our platform as an end-to-end XVA management system. It covers all of an XVA desk’s processes and addresses the needs from all business units across the enterprise, consistently and efficiently,” says Alexandre Bon, Murex’s head of market development for the Asia-Pacific region.

The solution is not limited to just one powerful simulation engine.

“XVA analytics are natively embedded with all the services of the MX.3 trading platform, from market data management to profit and loss validation to the execution of hedge trades,” says Bon.

The approach has been a hit with Murex customers, Bon says. This is especially true across Asia-Pacific where many had already been consolidating cross-asset trading operations front-to-back on the MX.3 platform. The functional needs can, however, differ markedly across institutions and countries.

“XVA is still a relatively new topic in Asia. Most regional firms are only starting to look at the central CVA [credit valuation adjustment] desk model. The exception is, of course, Australia, where major banks have been actively managing CVA and FVA [funding valuation adjustment] for years,” says Bon. Australian firms are now focusing on topics like capital value adjustment [KVA] as the Basel III deadlines near.

Thailand and Singapore are two markets where banks have been looking at CVA, putting the priority on pricing derivatives competitively, in line with international banks, before gradually rolling out transfer pricing with a central desk function.

For years, Japan had also been a key holdout. This changed with the recent adoption of CVA in Japanese accounting standards, prompting Japanese banks to invest in CVA simulation frameworks. The most advanced firms are now implementing CVA pricing and setting up XVA desks.

XVA analytics are natively embedded with all the services of the MX.3 trading platform, from market data management to profit and loss validation to the execution of hedge trades

Alexandre Bon, Murex

The Libor reform is also bringing new issues that firms need to tackle during their XVA implementation projects. The new risk-free rate versions of derivatives contracts are often more complex to evaluate than their Ibor-based equivalents, thus requiring modelling adjustments that can come with impacts on computational performance and hardware. Murex addressed both challenges through innovative enhancements in its MX.3 XVA engine, covering both plain-vanilla and exotic derivatives.

From an Asian perspective, what differentiates Murex from other vendors is first and foremost the emphasis on developing strong partnerships with clients. With over 320 specialist consultants organised in a regional delivery model across Asia, Murex aims to provide high-quality daily support and constantly align the MX.3 evolution with its clients’ strategic priorities. This model allowed the CVA project of Siam Commercial Bank in Thailand and another major Japanese bank to successfully go live on time, despite additional operational constraints introduced by the Covid pandemic since March 2020.

“Being financially independent has granted Murex the capacity to commit to long-term R&D investments around analytics and technology,” Bon explains. “This is of critical importance in a constantly evolving field like XVA, where the needs for huge calculation tasks is growing rapidly, especially with such metrics as intra-day sensitivities, MVA and KVA”.

A recent example is Murex’s new, innovative business process as a service (BPaaS). The solution enables banks to delegate heavy computational tasks or business processes to a service that Murex fully operates on the cloud to reduce operational and computational overload. Concurrently, the service is natively integrated with the bank’s on-premise MX.3 instance, thus eliminating the need for costly data and valuation reconciliation processes. Murex’s BPaaS service is now available for MVA and will soon be extended to other XVAs.

Lessons from the pandemic

“One key lesson from the pandemic is that the classic constraints of a static infrastructure can make it quite difficult to operate an XVA desk in times of stress,” adds Bon. “Sudden jumps in prices, volatilities and correlations meant desks had to rebalance hedges swiftly. They needed to refresh XVA sensitivities intra-day, while running additional what-if and stress scenarios to anticipate cross-gamma and wrong-way risk issues.”

This episode generated interest in cloud-computing models for their elastic computing benefits. Bon cites a customer in Australia who migrated their MX.3 XVA engine onto a hybrid grid setup that combines on-premise servers with virtual machines on a public cloud. This gives them the possibility to instantly tap into an unlimited number of computing cores when the need arises.

To cope with such market stress, Murex’s recently enhanced pre-deal XVA Pricer lets XVA traders run multiple what-if scenarios simulating changes to credit, funding spreads or collateral characteristics, prior to fixing the final client price.

“Some of the firms that had their XVA operations most affected, had been operating with tactical CVA libraries on the side. The smaller systems could not cope with the additional computation demands, and the manual integration and data reconciliation steps required by such setups made it impossible for their desks to react in a timely manner,” Bon says.

MX.3 offers a single, consistent platform with a single repository of trades, credit data and market data for XVA computation. This ensures accurate and real-time capture of trade representation and events, thereby eliminating the operational burden for heavy data mapping and reconciliation processes.

Such functions are not merely bells and whistles for institutions to brag about but are sought after because there is a practical need in the market for them. That is why the MX.3 XVA solution has been chosen by institutions in Australia and Thailand to replace the legacy tactical XVA vendor systems of banks in those countries.

This trend continues in places such as mainland China, India and Singapore, where the company expects more such replacement projects in the foreseeable future as institutions evolve from tactical to strategic solutions, and ultimately, from a standalone, siloed approach to one that is holistic and integrated.