Markit has brought together three existing products to deliver Integrated Resource Management, a front-office analytics application designed to help financial institutions calculate the costs of funding and capital resources required for OTC derivatives trades. The solution adds to the company’s Markit Analytics platform, which is based on the Quic risk analytics software acquired by the company two years ago.
The Integrated Resource Management module integrates Markit’s credit valuation adjustment (CVA), risk-weighted assets and initial margin solutions with a view to enabling users to manage balance sheet resources dynamically and optimise OTC derivatives trading decisions before execution. Markit also expects financial institutions to use the solution to price novation packages and renegotiate credit support annexes, and to replicate initial and variation margin calls in stress scenarios.
Regulation driving the need to understand the cost of capital requirements and the funding of initial margins includes Dodd-Frank, European Market Infrastructure Regulation and Basel III. According to Paul Jones, director, Markit Analytics, “To optimise margin and capital requirements it is necessary to have an integrated view of margin and capital resources on the balance sheet. Increases in initial margins reduce capital costs, but increase funding costs, so to trade optimally requires an understanding of both capital and funding costs. By bringing our established CVA, risk-weighted assets and initial margin solutions together, customers can run interactive scenarios to understand the trade-offs. This is made possible by the speed of the Markit Analytics engine.”
To date, the Integrated Resource Management solution has been installed at a tier one dealer in Europe, a new client for Markit, while some existing clients are implementing the solution as an extension to their use of the Markit Analytics platform. Sell-side firms are Markit’s initial target for the software, but the company’s roadmap does include a buy-side solution that will provide a combined view of initial margin and the life cost of initial margin to support optimal clearing. Jones says Markit could also develop a hosted version of the solution depending on market demand.