Future-proof systems

This interview was first published by SRP and was licensed by Bloomberg.

Karim Faraj, Bloomberg’s Global Head of Front Office Derivatives at Bloomberg discusses how the pandemic has accelerated the digital shift, the increasing use of technology and data to address risk management, and how standardization could help the industry become more efficient and transparent.

What is your assessment of the mid-March market disruption and what role will structured products play going forward?

The structured products world has been characterized by unprecedented levels of attention and activity over the past year. The retail market more generally, which relies more on face-to-face interactions, was hit harder by the pandemic than the institutional market, where many savvy professionals took advantage of the high volatility and monetary policy decisions.

To this day, a lot of uncertainty remains around how the new economy will play out, and the environment continues to be challenging, but structured products can offer appealing opportunities to investors.

Structured products can deliver cash flows tailored to specific economic scenarios in a very transparent manner and be used to protect investment portfolios. Also, in a low yield environment they can help generate higher returns, especially in volatile markets. Investors who prefer liquid investments

or are not comfortable with counterparty risk, can benefit from structured products through index strategies and ETFs.

Have you experienced changes in client demand for Bloomberg’s DLIB, risk solutions and services this year?

The investments in infrastructure and capabilities that Bloomberg has made over the past decades enabled us to provide our clients with the support and service they needed 24/7 during a very difficult time earlier this year. With the quality of market data and risk numbers being critical during volatile and uncertain times, technology solutions have become more important than ever for our customers on the sell and buy-sides.

As a result, we are seeing increased demand for our advanced risk and valuation solutions, particularly to better manage intra-day and credit risk. Market participants are realizing they need to approach risk management from a data and technology systems perspective, and are looking into risk analytics more deeply to keep up with fast-moving markets.

The pandemic also highlighted the importance of having resilient systems in place.

How is Bloomberg responding to the evolution in client demand?

Many firms have systems that only cover traditional financial products such as bonds and equities, but want to expand coverage to more OTC derivatives and mortgage products, as well as manage risk at the portfolio level for themselves or their customers with structured products. Our technology is truly multi-asset and allows for all different positions to be booked and risk managed in one system, providing consistency front to back.

By outsourcing costly and complex parts of their workflow, firms can focus on their core business: serving their clients. They also benefit from partnering with a firm that continuously invests in its systems and introduces innovations, helping clients improve their operational efficiency, adapt to market changes and comply with regulatory requirements.

Do you think the challenges brought up by the COVID pandemic - such as remote working - will accelerate the digital transformation of the structured products market?

Automation continues to help firms improve their investment and trading processes across multiple asset classes. Working from home during the pandemic has fueled this trend and increased interest in the greater operational resilience that hosted service providers can provide. Most firms do not have the time and resources to manage their digital transformation in-house and look to partner with technology vendors who can provide the products and services at a fraction of the cost.

Bloomberg is making structured products as easy to trade and process as bonds by using cutting-edge technologies such as machine learning and advanced quant models to integrate the workflows front to back. We are also increasingly providing its analytics and workflow components via APIs that can feed into the various systems clients use. Dynamic dashboards can easily be plugged in to provide more transparency and reporting and inform decision-making consistently with the firm’s target operating model.

Firms have the opportunity to seize this moment and set the right foundations to improve their resilience, cost-efficiency and ability to compete successfully and grow their business.

What are the areas of focus for market players in the structured products market in the current environment?

We are seeing a lot of interest in our flexible APIs, as firms sometimes had to make changes very quickly during the early days and weeks of the pandemic. Further complex market challenges loom on the horizon, such as the LIBOR transition. Bloomberg’s risk APIs help firms not only accelerate their digitization, but also ensure they control the cost of their operations.

As financial technology continues to evolve, and more market participants are digital natives, firms must focus on their competitive advantages and transform the user experience aspect of their offering. This leads many to outsource their back-end to robust technology partners.

We can provide open and easy to integrate APIs to handle multiple areas of their operations including: pre-trade idea generation, lifecycle management, front office intra-day, valuation and bucketed Greeks, P&L explanation/attribution, scenario analysis and stress testing, VaR, XVA, collateral management, hedge effectiveness, regulatory analytics like PRIIPs etc.

How do you expect the derivatives space to evolve in coming years? Will we see increased automation and standardization across functions and players?

There is an opportunity for the buy-side, the sell-side, brokers, custodians, regulators, clearing houses and vendors, to collaborate to make the structured product market more efficient and transparent, for the benefit of all market participants. Hand-in-hand with automation, standardization for example could bring substantial improvements to structured product markets and help make the industry more resilient and cost-efficient.

Industry associations such as ISDA are spearheading projects to define and promote standards for OTC markets. In a recent letter to the FSB, IOSCO and BCBS, they highlighted that the adoption of common data and process standards across the industry and increased digitization will improve risk management through greater alignment between contracts, processes and data. Increased automation will promote more efficient and cost-efficient operational processes, reduce complexity, and allow firms to deliver better services at lower costs.

Where do you think standardization is needed in the structured products market?

We believe standardization efforts should focus on the following three areas in particular: payments/settlement/clearing, financial product definitions in the OTC space and finally, the financial products lifecycle.

We are notably working with ISDA on the standardization of products such as autocallables, and the standardization of lifecycle events, such as exercise as part of the ISDA Common Domain Model initiative, among other projects.