Best Derivatives Risk-Management System: Calypso Technology

THE OTC DERIVATIVES industry has undergone upheavals since the credit cri­sis led to regulations such as Dodd-Frank and Emir, which mandate that swaps be centrally executed, cleared and reported. Calypso Technology, an integrated capital-markets platform provider, has met these changes head-on, enabling customers to make a smooth transition to the new world of swap execution facilities, CCP, and data repositories.

In 2013, Calypso announced the extension of its OTC clearing system for end users to support SEF connectivity. As a first step in providing derivatives end-user clients access to SEFs for derivatives trading and execu­tion compliance, Calypso is interfacing with TW SEF from Tradeweb, an operator of fixed income and derivatives marketplaces, to offer an out-of-the-box request-for-quote and order-book integration system.

“We have had many accomplishments in the area of derivatives risk management in 2013, especially in continuing to provide best-in-class software for management of cleared products as well as complex OTC bi-lateral portfolios on one common platform,” said Sanela Hodzic, Calypso’s managing direc­tor of strategy and marketing. “We have been recognized for our work on cross margining, clearing and collateral management, all topics that Dodd-Frank and Emir made a new reality for anyone needing or using a derivatives risk-management system.”

Sanela Hodzic, Calypso

OTC Clearing Hong Kong (OTC Clear), a sub­sidiary of Asian exchange giant Hong Kong Exchanges and Clearing, cleared its first OTC derivatives transaction using Calypso’s CCP OTC clearing solution when it commenced business in November 2013.

OTC Clear selected Calypso as the system to provide end-to-end OTC clearing, processing and risk management of interest-rate swaps and FX non-deliverable currency forwards. OTC Clear is also the first clearing house to employ Calypso’s collateral management module to handle and process collateral. “Our work with HKEx reinforces our position as a leading technology provider for the global OTC markets,” Charles Marston, chairman and CEO of Calypso, said in a statement.

The redrawn market-structure landscape created by Dodd-Frank and Emir is char­acterized by bifurcation between the tradi­tional dealer-to-customer model, akin to the exchange framework found in equities and futures. “On one hand, the OTC market is becoming a high-volume flow business, but on the other hand it still has some residual struc­tured portfolios,” Hodzic told Markets Media.

Calypso’s trading and risk-management platforms need to process both sides. “Half of that business is no longer structured and highly complex, but a vanilla flow business which needs to be processed through a clear­inghouse, through a credit hub and the whole market structure,” said Hodzic. “I would argue Calypso leads the way with those market structure changes and then brings that back to the industry.”

Another accomplishment in 2013 was the release of Calypso v.14, which features low-latency data grids aimed at ultra-fast performance requirements for complex risk-management calculations. Market par­ticipants use this for limit management and compliance with Dodd-Frank and CFTC 1.73.

“On the technology front, we came out with huge performance improvements around low latency and speed PF calculations which are necessary when you’re computing, for exam­ple, limit checking using VARs,” said Hodzic. “There have been a lot of investments in tech­nology in order to meet the regulatory and business requirements associated with fast limit checking.”

Hodzic continued: “You have to be able to accommodate pricing models, risk manage­ment of complex derivatives, and be the leader in the flow stocks that have gone CCP, cleared collateral exchange on a daily basis,” Hodzic said. “Our goal has been exactly that. We have continued to invest in our platform and be the leader in clearing and collateral amid all the market structure changes.”