A consortium comprising Zeliade Systems, OTC-Conseil, JPLC, Dexia CL, Evry University and Microsoft France and dubbed CRIS (Credit Risk Services) plans to develop a platform for independent valuation and risk management of credit derivatives.
The consortium will have its first test client in the second part of the year and there will be ongoing developments with new credit products arriving in the market. The platform is expected to be released to the market by the end of this year/early next year.
Explaining why the consortium has been formed, Luc Hautemanière, head of business development, Zeliade Systems, says: “There is great concern about independent sources for pricing and risk analysis in the market. Also, there is the concept of fair value that comes from different legislation that has been put in place. The crisis around sub-primes really highlighted the problem: many credit products, for instance CDSs and CDO of ABSs, were clearly mispriced by market players.
“(The consortium is) all about providing independent sources for pricing, evaluation and risk assessment of credit derivatives – and more generally of counterparty risk.”
Hautemanière believes that the right partners are in place within CRIS. Zeliade Systems specialises in software for the derivatives space, so already has many components that have been developed and tested with clients, it reckons.
Dexia CL has been a long-term client of Zeliade, itself a long-time partner of the Université d’Evry, which has been awarded the credit risk chair by Paris Europlace for five years. JP Lardy, founder and president of JPLC and former head of credit portfolio trading at JP Morgan, has been closely involved from the beginning in the design of Zeliade credit analytics, favoured by Dexia CL, Nexgen and BlueCrest. OTC-Conseil and Zeliade have already teamed up successfully on several projects in the credit space. Zeliade has been selected among 25 out of more than 300 ISVs by Microsoft France, to be part of IDEES, an initiative to support French ISVs, that entitles Zeliade to technological, marketing and sales support, in France and outside.
Adds Hautemanière: “Microsoft France brings in the access to their technology centre which we can use to test our applications, and also invaluable consulting resources for the design of the platform itself. Everyone is bringing their own area of expertise to the table. I think we have all the major pieces that provide true value to the consortium.”
Unlike existing solutions, CRIS will provide proven implementations of publicly available models and methodologies with a focus on transparency, according to the group.
Instead of making an arbitrary choice of a single model, CRIS will provide production-grade pricing and risk engines for the prominent models that are finding favour with both practitioners and the academic community. The spectrum of prices and sensitivities provided by CRIS will be of interest to risk management, financial officers and consultants in order to validate inhouse risk positions and analytics, the consortium believes.
The target audience for the service includes banks, asset managers/hedge funds, insurance companies and consultants, as well as regulators.
Hautemanière reckons that the consortium’s completed offering will stand out from existing solutions as it will remain independent and will offer customers the possibility to have access to production-grade implementations of the major types of models, whereas most services that currently exist are offering only the one or a small number of models. “There is no single model that can be applied to all of the various types of analysis that are required to properly assess the risk and the price of a portfolio. Our aim is also to provide different models depending on the type of analysis customers want,” he says.
From a technology point of view, CRIS will be available as an ASP service based on a .Net-based distributed HPC Microsoft architecture. The platform will also be available as a turnkey version that can be deployed inhouse and that will be targeted at fund administrators and first-tier bank risk departments.
“We strongly believe that an ASP service with the required degree of transparency and flexibility, coupled with robust and fast analytics, can greatly enhance the risk assessment of credit-risky positions across books of credit derivatives and more generally to better cope with counterparty risk,” says Claude Martini, CEO of Zeliade.
All of the parties in the consortium are ultimately interested in utilising the completed solution in support of their individual services around risk, according to Hautemanière.
For Dexia there is the potential to have access to a platform which is more suited to its own interests and those of its clients, because it will be serving as an early test client.
Microsoft France has an opportunity to promote the HPC platform in an industry in which it wants to push its services.
Evry University, which has been specialising in credit derivatives for some time, gains the chance to have access to a system which has been introduced to the market, rather than relying solely on a theoretical point of view.
The network of Zeliade partners in the Credit space (which includes Markit, CMA and B&B Structured Finance), the newly opened offices of OTC-Conseil in New York, together with the experience of Lardy, will all help to position CRIS as a major international player, the consortium believes.