Nipping Risk in the Bud

Two new products from SunGard’s global trading business are designed to mitigate risk before it’s even taken.

The advent of remote electronic access in the 1990s completely changed the way trading is done and also gave rise to a number of new requirements for the way that financial institutions monitor and control their risk. The rate of change has, at times, been staggering and one only has to take a brief peep into the history of electronic trading to see that risk management practices have not always managed to keep up, especially with some of the developments which have occurred at the front end.

Not only is the whole trade cycle now far more rapid, but brokers’ clients can also be trading on numerous different venues directly, with systems of their own choosing, or directly through an API. This has resulted in an increase in the complexity of risk management at all stages of the trading cycle. For large global brokers using multiple trading platforms this is a particular issue: powerful risk-management tools and systems, such as GL Selector and GL Win Supervisor, are available, but they cannot provide the global visibility required to be able to monitor all client orders.

Such a situation makes comprehensive pre-trade risk management very difficult. While mistakes and errors, and even worse rogue trading, can still be identified swiftly – assuming that the right post-trade risk management is operating – it would clearly be beneficial if potential issues could be identified before they occur.

To help resolve this issue and also address the need for closer monitoring of positions and credit limits, SunGard’s global trading business has recently launched its Global Execution Server (GES). This provides brokers with a consolidated picture of all its risk across multiple markets, regardless of the systems that are being used to send the orders to the various exchanges.

The immediate benefits are obvious; but GES also provides additional functionality. Because it is fed with drop copies of all the activity of brokers’ clients on all exchanges, it can be used as a comprehensive disaster recovery solution. Furthermore, as it can connect to other external systems, GES can be used as a single source to send real-time confirmations to back offices, issue tickets and calculate margin requirements and P&L.

GL Delta Selector: Niche but nice

Another new product from SunGard’s global trading business is GL Delta Selector. This is an additional mode of service for GL Selector, the pre-trade risk management and position keeping system, specifically aimed at the trading of futures and options on the same book.

The main advantage of using GL Delta Selector accrues from its ability to consolidate the margin requirements for options and futures position on the same underlying, taken out on the same exchange. Normally these margins have to be calculated separately, meaning that there is no offsetting between a future and an option on the same underlying.

This of course fails to make the most efficient use of margin. GL Delta Selector addresses this by aggregating those futures and options with the same maturity: essentially, it converts the option positions into ‘quasi-futures’ via an algorithm based on their deltas (hedge ratios) and initial margin per lot values, as provided by the listing exchanges. The trading firm can therefore reduce margin requirements and also improve its multi-product and option risk management.

Importantly, Delta Selector is able to integrate working orders with those that have been fully executed, which is essential when a more conservative trading approach is required. Delta Selector provides a far more powerful way of monitoring than can be achieved by standard post-trade models, such as SPAN, working alone.

The demand to mitigate risks across the entire deal chain will not diminish. Trading, while simple in concept, is becoming increasingly complex and vendors have to respond to the frequent changes in the market places they connect to, as well as meeting the specific business process needs of their clients. Pre-trade risk management will continue to present challenges but, with the launch of GES and Delta Selector, SunGard’s global trading business continues to address the issues involved.