The role of technology in the structured products market will be key to provide connectivity and post-trade services to the sell- and buy-side, as well as to meet new regulatory requirements although this is not the first function of these firms, according to panelists during the Can Technology Make the Market Simpler and Better? panel discussion at SRP's3rd Nordic Structured Products and Derivatives Conference 2017, held on September 27 in Grand Hotel Stockholm.
According to Jean-Marc Eber, founder and chief executive officer at Lexifi, the main goal of the company is to provide a complete system for "managing and manipulating" structured products and complex derivatives "which does not only include the usual quantitative risk analysis" but also document generation capabilities to enableusers to observe all the structured products they have in their books.
"The goal is to demystify structured products and to turn them into normal financial constructions like bonds, for instance, and to give all the tools necessary for analyzing and mastering them," said Eber.
Geraldine Laussat, head of structured products, RFQ Platforms at ITG, pointed that to survive in the current environment the buy- and sell-side community have been forced to deploy new technology tools to meet new regulatory requirements.
"That's why in the last few years fintech has been playing a very key role in this technology mutation," she said. "However, the reason we are probably a little bit more active in the rest of Europe compared to the Nordic region is very simple - the private banks in general." According to Laussat, the high net worth is bank owned and thus the banks face much more challenges than just implementing the Mifidor other guidelines around structured products. "They trade equities, ETFs and plenty of other instruments," said Laussat. "Structured products will be probably the very last instrument they think about at the moment."
However, Laussat believes that the private banks and companies in the region successfully handled the Mifid implementation project over the last few years around two questions: whether they need technological resources to automate internal functions with internal IT system to cover the different Mifid subjects or whether they need to outsource this service to third party providers.
"The answer we gave to all these companies is very simple - they need to find what brings a competitive advantage compared to their peers and what doesn't," said Laussat.
Despite a slowdown in activity in the Nordics, the region is not less technologically developed than the rest of the markets in Europe, according to Eber. "Our first big technological client was a Scandinavian one - a Danish company that ten years ago understood the importance of upgrading the technology," said Eber. "Therefore, at least for us at Lexifi, Scandinavia is a real runner."
However, stressed that as a technology provider, "we don't want to appear as doing a regulatory assisted development," Eber said. "We don't want to be in a situation where we are just pushing solutions as a result of responding to some regulatory pressure." According to Eber, technology companies need to think outside of the existing regulation and provide technology solutions that are "consistent not only with the current regulatory changes but also with the ones in the next two to five years".
"Structured products are heterogeneous," said Eber. "There are little differences between them and you have to be very precise when working with them.To manipulate these [products], we are convinced that this is not valuable to develop such a system in one bank or in one company only. It is simply too much investment. However, we cannot replace banks or asset managers since we don't know the clients the way they know them. We just give the tools."
The panel agreed that the reason technology implementation is not so fast in the Nordic region as compared to other regions is a question of standards. "Let's take a step back when 25 years ago we started with equities and with simple derivatives putting them on trading platforms doing electronic execution and so on," said Kaare Andersen (pictured), vice president and head of the Nordics at Numerix. "The next step is structured products and we [Numerix] already have a solution out there with the Bank of Singapore, a solution that has the entire structured product process in one solution." According to Andersen, the major step is for people in the business to understand that technology is not a threat but an opportunity to increase the productivity, the effectiveness and the speed of the process. "Speed is essential and it is going to be the name of the game in the next years," said Andersen.
Technology will change the role of people in the structured products market,according to Laussat. "Due to regulation pressure volumes [have] decreased," said Laussat."We need to spend more energy now to increase the volumes again and it is not by executing structured products. Technology will allow us to spend more time speaking with our clients and to put more energy on education."
Andersen noted that Numerix has recently bought a small company called TFT which provides a technology called 'dependency graph'. "It is a kind of artificial intelligence which picks up the relevant information and calculates in the fastest way possible all the necessary things and provides this to the trader," said Andersen. "A London-based bank used this technology for their fixed income trading offerings and on one of the electronic platforms increased their market share from 2% to 18%."
Eber concluded that the market for structured products has shifted completely over the last few years. "At Lexifi, we have now developed a product that has nothing to do with quantitative analysis but which is a natural language analyzer of term sheets," said Eber. "This is a mixture of artificial intelligence, of natural language processing and of big data, but it has nothing to do with quantitative work."
However, despite the different functions automation can deliver, the next step for technology in the structured products market will be to continue providing connectivity, according to Laussat. "Everybody is using the different platforms as standalone systems. However, connectivity is necessary with the sell-side and of course with the post-trade tools," said Laussat.
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