The Internet is making derivatives trading, a bastion of the financial elite, accessible to a broader range of institutions and individuals. Banks are hopping on board with new solutions aimed at automating trading and accounting procedures for derivatives, the most exotic of financial instruments.
Bank One has signed on with Arcordia, an ASP-based platform for back-office processing of derivatives that was spun out of J.P. Morgan a year ago. Chicago-based Bank One is the first external client of Arcordia, which will provide back-office support for Bank One's global derivatives portfolio.
Arcordia will perform payment processing, reconciliation, confirmation generation and accounting services for Bank One, whose predecessor, First Chicago, was among the first capital markets providers to offer interest rate and currency swaps. "The system's functionality and Arcordia's expertise will help us deliver even higher levels of service to our commercial customers and counterparties," according to David Bergman, senior vice president and head of capital markets operations at Bank One.
The Bank One win for Arcordia, huge as it may be, is dwarfish compared to the January merger of J.P. Morgan and Chase Manhattan, which together process 500,000 over-the-counter derivatives, about a third of the world market. After the merger, the $700 billion goliath named Arcordia as its strategic back-office processing platform, continuing a relationship begun in 1998 when J.P. Morgan built the platform as a high-tech, straight-through processing solution.
Over the next two years, Arcordia enabled Morgan to cut its transaction costs by 40% while tripling volume. That prompted a decision to offer the platform to other banks which, like Morgan, "were experiencing exponential volume increases and complexity in the instruments being traded," said Simon Nutt, director of business development at London-based Arcordia.
Against this backdrop of change, financial institutions have been spending up to $100 million every five years replacing their legacy applications. Such systems remain inflexible and slow, and are fraught with reconciliation and data management problems. Morgan itself maintained 20 such systems in-house before Arcordia made them obsolete.
Other banks are also creating Web-based trading or post-trading environments. Deutsche Banc Alex. Brown has installed Derivatives.com, a Web-based trading and portfolio risk management system from Imagine Software, New York. The bank's clients are using the ASP service for derivatives trading analysis and risk management.
Although Deutsche Banc Alex. Brown had been using Imagine Trading System for its proprietary trading since 1996, the service was only available to the bank's large institutional customers. By offering Web-based Derivatives.com, Deutsche Banc Alex. Brown is delivering technology to its equity clientele that was once beyond their reach.
Powered by a Sun Microsystems platform, Derivatives.com delivers the functionality of the Imagine Trading System in a cost-efficient and Internet-accessible manner, including delivery of Reuters real-time market data and RSA security authentication. It also performs many middle and back-office services, including corporate actions maintenance, daily event processing and standard pricing curve generation.
"Derivatives.com gives our customers the tools they need to trade and manage risk effectively," said James Rowen, co-head of prime brokerage and strategic client services at Deutsche Banc Alex. Brown. "For institutions like hedge funds, it's a quick and complete package."
In France, Societe General has installed Calypso, a Java-based back-end processing system from Calypso Technology, San Francisco, to support ClickOptions, its new retail equity derivatives business. ClickOptions (www.clickoptions.com), which went live in May, opens up the trading of exotic financial instruments to retail investors.
Calypso provides an integrated business solution for ClickOptions' back-end operations, noted Lionel Gibert, managing director at ClickOptions. "We were able to go live much quicker than if we had to juggle different pieces of software."