Following a spate of client wins at the end of last year, valuations and risk analytics solution vendor Numerix has added another to the list in the form of custodian and fund administrator Northern Trust. The bank has enhanced its platform for processing OTC derivatives via its strategic partnership with Numerix to provide daily independent pricing for its structured products and other bespoke instruments. The vendor has also recently released new versions of its pricing and risk analytics software: Numerix CrossAsset and Numerix Portfolio.
Peter Cherecwich, chief operating officer for Corporate & Institutional Services at Northern Trust, explains the drivers behind the implementation: “The derivatives industry, regulators, investors and our clients globally are demanding increasing independence and transparency for OTC derivative valuations. Derivatives perform critical functions for investment managers and institutional investors, and our global alliance with Numerix brings a range of valuation capabilities and depth of knowledge to help our clients exercise greater control over valuation of these assets while meeting the standard for transparency demanded by sophisticated investors.”
According to Numerix, the expanded capabilities of the Northern Trust valuations platform therefore allow for greater transparency of reporting for OTC instrument types. To this end, the enhancements allow the custodian and fund administrator to independently price exotic OTC derivative instruments and provide clients access to the mathematical model, calibration techniques and market data components of the pricing process to enable fully transparent reporting.
Specifically focused on hedge funds, investment managers and institutions requiring daily independent pricing for structured products, these capabilities are delivered to clients globally through Northern Trust’s integrated derivatives processing platform. In addition, Numerix financial engineers work alongside the derivative pricing teams at Northern Trust operation centres across its network to provide clients with access to valuation support.
As well as this client win, the start of January has witnessed the launch of two new versions of Numerix’s flagship solutions: Numerix CrossAsset and Numerix Portfolio. With all this talk of increased transparency in the valuations space, Numerix CrossAsset version 8 is targeted at providing users with immediate access to the enhanced pricing models, methods and risk management functionality of the vendor’s solution. The vendor has also introduced refined protocol enhancements for the market standard pricing of simpler more fungible instruments pertaining to the global standardisation of derivatives pricing. Other newly added conventions include those that can be used in relation to regional FX markets as well as new cash dividend conventions in equity options.
Steven O’Hanlon, president and COO of Numerix, has long claimed the vendor’s solution is the market standard for derivatives and is confident that the new releases will be well received. “The new Numerix CrossAsset brand and naming convention now more accurately reflects our ability to provide users with a unified platform for consistent valuations and risk management across all positions and asset classes,” he explains. “With the latest versions of Numerix CrossAsset and Numerix Portfolio we have successfully delivered the analytical tools and enhancements our customers need to operate in an ever evolving and volatile marketplace.”
One specific improvement to version 8 of the solution has been the addition of the Bates stochastic volatility model with jumps for equity and FX asset classes. This new model supports a range of pricing methods and builds on the Heston stochastic volatility model. It adds a jump process that allows users to reproduce volatility smile for very short dated options and use those options as calibration instruments. According to Numerix, it is the standard model for pricing Cliquet options, which have frequent resets. The Bates model is also supported as an equity component in the Numerix hybrid framework.
The solution also features improved pricing methods and new cash dividend conventions for American options. One new method is the decoupled volatility method, which distinguishes between the volatilities of the underlying and options to eliminate arbitrage when pricing several options with different strike prices simultaneously. The method can also be used to calculate European implied volatilities from the market prices of American options.
Numerix CrossAsset now has added enhancements in support of trading and risk management for “big bang” standard North American (SNAC) credit default swap (CDS) contracts. New enhancements include conversion of conventional spread quotes to upfront payments for investment grade CDS and the ability to import the SNAC Libor curve needed for these calculations. It also features commodities data import in the Numerix Bloomberg Edition, which now fully supports the Numerix Commodities module as well as the Numerix hybrid framework for commodity hybrids.
The CrossAsset solution underlies all of Numerix’s other offerings but on top of this, the vendor has also added more functionality to the latest version of its front office solution for pricing and managing complex derivative portfolios: Portfolio. The new version of Numerix Portfolio provides enhancements to Portfolio’s risk and scenario analysis capabilities, including ‘mark to scenario’ simulations. In the latter approach, trades can now be priced at a future date, based on user supplied future dated market data, automatically generating any necessary fixing data and returning pricing and risk quotations for the future valuation date in question.
On the model side, given clients increasing need for hybrid models, this version of Numerix Portfolio implements a hybrid credit-equity-interest rate (CR-EQ-IR) valuation model that can be used for pricing such trades as equity linked convertible notes and bonds, with arbitrary call structures, including soft calls. Other model enhancements include calibration of the Libor market models to CMS instruments (CMS swaps, CMS caps/floors, and CMS spread options).