Structured finance and derivatives solution specialist Principia Partners has just launched its new software as a service (SaaS) platform for valuations and risk management, following a year of development with early adopter US derivatives advisory firm Swaps Financial Group. The new delivery model is targeted at the smaller end of the financial institution spectrum and can facilitate a rollout of the solution within five days, explains Doug Long, executive vice president of business development and product strategy at the vendor.
“With the release of our SaaS platform we are offering an alternative delivery model to smaller players in the market. The move will expand our range of potential clients and is a natural extension of what we already offer,” says Long. Principia has therefore been working on the SaaS version of its solution for just over a year and it is already live with early adopter Swaps Financial Group, who provided feedback during the development phase.
According to Long, the work was largely focused on testing and purchasing the hardware to support the new delivery model because the technology underpinning the software actually lends itself well to this kind of delivery. “Both our enterprise and our SaaS solution include the same underlying data, valuation analytics and risk management functions, it is merely the delivery model that is different,” he adds. “We are able to facilitate a relatively quick rollout even for our enterprise solution, but SaaS is even quicker and, in general, firms can be up and running within five days, taking into account training to getting up to speed on the system.”
The development of a SaaS model has been a significant trend within the vendor community over the last few years, as vendors focus on providing a lower cost alternative to potentially lengthy custom rollouts. For example, most recently, SunGard combined two of its key data management solutions under the SaaS banner.
Long reckons Principia is able to differentiate itself from the competition through its focus on a particular niche: structured finance and derivatives. He claims that the vendor’s ability to handle the subtleties and nuances of certain complex derivatives and structured fixed income products makes it stand out from the plethora of other offerings on the market. “We are able to demonstrate a long history of delivering the data and market calibrated models that prove there is a reliability and strength in the resulting valuations and risk assessment our clients make,” he contends.
In fact, in April this year, the vendor indicated its early adopters, the US Federal Home Loan Banks (FHLBanks) of Atlanta, Boston, Cincinnati, Des Moines and New York, have now been using the Principia Structured Finance Platform (Principia SFP) for 15 years.
As for the future, Long predicts that competitive forces in the market will mean that vendors in the derivatives valuations space will need to prove their market expertise and ability to meet clients’ needs. “This will result in some degree of consolidation and the further specialisation of niche players,” he adds.
Principia has been offering its enterprise solution on the market for the last 15 years, but over the last five years it has redoubled its focus on issues related to the derivatives and structured finance markets, says Long. After all, in the post-crisis world, it is no secret that investment managers need to get a much better handle on the data underlying their valuations and risk assessments.
“We are more than just a valuations provider,” adds Long. “We deliver a comprehensive portfolio management and risk management solution. Firms can stress test the assumptions that have gone into their valuations on a single platform. This enables them to manage risks at the portfolio level, as well as the securities level. For many of our users it is used to link derivative valuations associated to their asset portfolio for stress testing and hedging purposes; an important requirement in the current market. It is no longer sufficient to just provide valuations. Firms need to put this data into context and relate the data to the other assets and liabilities in a portfolio. If a firm is buying derivatives to hedge a portfolio, it needs to be able to judge whether that hedge is effective initially and on an ongoing basis, for example.”
According to Long, the platform also allows clients to maintain all the performance, bond level and cash flow data required to effectively manage fixed income and structured finance investments. For example, with residential mortgage backed securities (RMBSs), valuation techniques often need to capture embedded optionality in the structure, as well as the usual prepayment, default and delinquency risk. “These risks then need to be monitored to make sure they are under control. Firms are being compelled by regulation, internal compliance and their customers to manage and disclose their investment positions much more transparently,” says Long.
According to a survey the vendor has recently conducted, over 80% of investor respondents stated they are looking to invest in technology to support their investment analysis and risk management functions over the next 24 months. The full results of the survey will be out later this year (check back soon for more), but this is a good indication that the market is ripe for providers that are able to pitch the right solution.
As for the next developments for Principia, the vendor is looking to strengthen its forecasting tools, for example cash flow reporting for structured finance products. “This is being driven by new regulations in Europe and the US that are seeking to mandate the provision of cash flow data for new issuance, although this has not yet been finalised. More detailed data on securitisations has already been a major focus of the regulators and industry bodies and this will continue into next year and beyond,” concludes Long.
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