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KONDOR+
HELPING BANKS TO MEET CHANGES
IN MARKET PRACTICE AND REGULATION
Kondor+: Helping banks to meet changes in market practice and regulation
The financial crisis in 2007/2008 highlighted a number of weaknesses
within the markets: ineffective counterparty risk management; a lack
of transparency; and exposure to systemic risk when one counterparty
default cascaded into defaults for other parties. Risk management
failings were prominent across market participants and acted as a
catalyst for regulatory changes.
Post-2008, banks struggled to reinvent themselves,
driven by regulatory change and the introduction
of new market practice: the implementation of
EMIR, Dodd-Frank and Basel III is imminent; while
new practices such as multiple-curve pricing, OISdiscounting and liquidity charge computation at
price discovery have become market standards.
In short, we have seen the biggest shake-up in the
market since its inception, with banks now tasked
with delivering increased capital requirements,
tighter risk monitoring, and more frequent
reporting. Changes to their organization, processes
and systems are all too often needed to ensure
compliance with the new demands.
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Fortunately, Kondor+ continues to evolve to meet
the post-crisis changes in regulatory and market
practice. Working closely with customers, Misys has
been able to fast-track new features into Kondor+,
tailored to the specific requirements of individual
banks, and all from a single integrated platform.
This enables Misys’ customers to meet their
regulatory obligations, while continuing
to pursue growth strategies safe in the
knowledge that their Kondor+ deployment
will also continue to evolve to support their
business goals.
Kondor+: Helping banks to meet changes in market practice and regulation
FROM SINGLE CURVE TO MULTI-CURVE
Kondor+ enables banks to comply with new market practices requiring
multiple curves to discount derivatives and evaluate forward rates.
Before 2007, the swaps market priced and traded
off a simple set of yield curves. Then, the financial
crisis brought a distortion of interest rates.
Basis spreads, which had previously been minimal,
widened to a point that could no longer be ignored.
The spread between the Overnight Index Swap
(OIS) rate and LIBOR existed before 2007 but it
was constant and very small – to the extent that
everyone assumed that OIS and LIBOR were
interchangeable. This is no longer the case.
Additionally, differences in value between
collateralized and uncollateralized trades (negligible
before 2008 thanks to small basis spreads and low
volatility) were now becoming material.
The old way of valuing derivatives with a single
master swap curve for discounting and projecting
forward rates was no longer viable. This recognition
has led to a significant shift in market practice,
with the abandonment of the single-curve pricing
methodology and the adoption of a modern,
multiple-curve approach.
As the market became more and more aware of the
credit and liquidity risks associated with short-term
interbank lending, liquidity and credit premiums
began to be paid on interbank LIBOR funding. This
meant that LIBOR rates of different tenors showed
varying amounts of credit/liquidity spread, and this
increased with term. As basis spreads widened,
it was no longer possible, for example, to price
a 6-month swap off a forward swap curve where
the underlying was a 3M rate. To comply with the
new market practice today banks need to be able
to build multiple forward rate curves for forward
LIBOR, reflecting 1M, 3M, 6M and 12M tenors.
A second dynamic relates to the discounting of
collateralized trades. Credit Support Annex (CSA)
collateralization agreements were previously used
by banks as a way of mitigating counterparty
risk. OIS discounting is now the market standard.
The OIS yield curve is recognised as being
essentially free from credit or liquidity risks, built
as it is on the prices of OIS swaps subject to
overnight margining.
Issues relating to discounting curves are also being
shaped by ISDA regulations. To be consistent with
these new standards, different sets of discounting
curves could be required. For example, for the five
major currencies (USD, EUR, JPY, GBP, CHF), the OIS
curve should be used for discounting while for other
currencies, the USD OIS rates should be used for
single currency instruments.
This means that for a vanilla IRS in PLN, the PLN
discounting curve should be implied from the
EUR OIS rates. FX rates for EUR/PLN are required
to do this: FX points for the short term and currency
basis spreads for the long term. In this way, the
implied yield curve will depend on at least one
other yield curve.
A more sophisticated, more accurate approach is
required. banks must ensure that their valuation
processes, systems, and reporting are able to
handle both a discount curve and a forward
curve, across all asset classes, for counterparties
with or without collateral agreements, based on
different currencies.
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Kondor+: Helping banks to meet changes in market practice and regulation
Specifically, banks must have the
capability to handle:
• Swaps pricing where the collateral is in
a different currency;
• Pricing of non-collateralized swaps;
• Specification of cross-currency swap curves.
Kondor+ now includes a multi-curve module to
calibrate yield curves coherently and flexibly and
enable different scenarios to be associated to each
curve and to each type of instrument.
Different curves can be assigned to reflect:
• Discount or forward usage;
• In the case of forward usage, the appropriate
underlying index (3M LIBOR, 6M LIBOR, etc.);
• In the case of discounting usage, the collateral
information (CSA, CCP...)
• Currency;
• Type of deal.
The discounting curve can be easily calibrated to
take account of a CSA currency that is different
from the deal currency; while risk management of
the different curve dependencies is also facilitated.
Kondor+ Multiple-Curves module:
A Snapshot
• Easy calibration of discounting curves, taking
account of CSA agreements as a parameter
for curve assignment
• Ability to build dedicated curves in accordance
with the underlying tenor - deposits, futures,
FX points, FRAs, swaps, single-currency basis
swaps, and cross-currency basis swaps
• Differentiated funding curves for
counterparties with and without collateral
agreements (LIBOR vs. OIS discounting)
• Calculation of risk exposure for all market
data inputs
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Kondor+: Helping banks to meet changes in market practice and regulation
CONNECTING FOR CCP
Kondor+ now offers a standard interface with MarkitWire, allowing
customers to manage the whole CCP trade workflow as required by
Dodd-Frank and EMIR .
The 2008 financial crisis occurred in part due to the
lack of transparency in the trading and processing
of OTC derivatives, which account for almost 95%
of all derivatives trades. G-20 world leaders reacted
with an agreement that all standard OTC derivative
contracts should be traded on exchanges or
electronic trading platforms, where appropriate,
and cleared through central clearing counterparties
(CCPs), in order to reduce systemic risk.
The agreement filtered into the Dodd-Frank Act
in the US and the European Market Infrastructure
Regulation (EMIR).Bilateral clearing will gradually
disappear, to be replaced by a CCP that will
intervene between the two counterparties in a
transaction designed to manage the counterparty
risk; the CCP becomes the buyer to every seller and
the seller to every buyer.
Different players have a role in the CCP trade
workflow: the affirmation platform that provides
post-trade execution functionality; the trade
repository that makes it possible to see a firm’s
underlying position and exposure from a central
vantage point; and the clearing members that act
as a liaison point between buyers and the CCP
for all post-trade functions, including daily margin
management. There are currently about a dozen
CCPs clearing OTC derivatives based on interest
rates, credit, equity and commodities.
The challenge facing financial institutions has been
the need to incorporate the necessary connectivity,
calculation engines, configurable rule-based
workflow and specific reporting requirements into
their current systems. And speed is of the essence.
This transformation of the capital markets is
happening at a rapid pace. With a deadline set by
the G20 of 31 December 2012, the players involved
need to move fast.
A key requirement of systems is to provide
connectors to the CCP workflow. MarkitSERV
connects dealers and their clients to CCPs, trade
repositories and third-party administrators,
through an unparalleled network of participants
and services.
Kondor+ now offers a standard interface with
MarkitSERV’s MarkitWire system, allowing
customers to handle the whole trade workflow
as required by the new regulations (trade,
novation, clearing and so on). Kondor+ delivers
standard reporting enabling users to monitor their
transaction flows, control their margin requirements
and handle the end-of-day process. Coupled with
the existing Kondor+ Collateral Management
module, customers can now face the new
regulatory requirements from a single platform.
MarkitWire Connectors: A Snapshot
• MarkitWire deal workflows:
–– Dealer to Dealer
–– Broker to Dealer
• Supporting the following events:
–– New trade
–– Amendment (unilateral, bilateral)
–– Cancellation
–– Termination (full, partial) via the
amend function
–– Novation (full, partial)
• Support for interest rate swaps & swaptions
• Support for other instruments can be
added on request
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Kondor+: Helping banks to meet changes in market practice and regulation
BASEL III: DRIVING ACTIVE CVA MANAGEMENT
New functionality within Kondor+ helps the trading desk to price
correctly for CVA and to manage counterparty credit risk more
effectively, while the Risk team can manage the total CVA position,
in full compliance with new regulatory requirements.
A credit value adjustment (CVA) captures
the counterparty default risk inherent in OTC
derivatives portfolios. CVA is a highly volatile
figure that depends directly on fluctuating daily
market prices.
The potential cost of doing business with certain
counterparties is now a significant concern for
anyone trading in the financial markets. In the past,
the valuation of counterparty credit risk (CCR) was
largely ignored, thanks to the relatively small size
of derivatives exposures and the high credit rating
of the counterparties involved - in general, other
highly rated financial institutions. But as the size
of derivatives exposure increased and the credit
quality of the counterparties fell in the wake of
the financial crisis, the valuation of CCR could no
longer be assumed to be negligible and had to
be properly reflected in a fair value calculation of
the financial instruments. This increased focus on
counterparty risk is being driven by new regulations:
• EMIR in Europe and Dodd-Frank in the US, which
will require standard derivative contracts to be
cleared via a CCP. Non-cleared derivatives will
require higher capital requirements.
• Basel III, which is introducing more capital buffers
and is also bringing in additional requirements for
the CCR and the CVA value at risk (VaR).
The new regulatory requirements for CVA come
into force from January 2013. They will drive a more
proactive management of CVA, since hedging CVA
positions will result in a lower capital requirement,
and hence increased trading profitability for banks.
A fundamental challenge facing financial institutions
is to integrate CVA-specific requirements into their
existing organizations and IT architectures. The way
this is done depends on a number of decisions.
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CVA for compliance or for profit
he level of CVA management sought (to measure,
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advise, hedge or trade) will differ from bank to
bank, depending largely on the strategic direction
and the size of the derivatives book. Smaller banks
may apply CVA purely to comply with accounting
and Basel III rules; more advanced trading
operations will look beyond compliance and will
try to make money out of their CVA desks.
Dedicated or modular CVA desk
anks may opt for a dedicated CVA desk, or
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implement CVA in a modular way, with each
trading desk managing its own CVA position.
The dedicated CVA desk would compute and
manage the bank’s global CVA positions and levy
charges on the different trading desks as a ‘price
for protection’. The trading desks would require the
CVA protection costs at the pre-trade level, so that
they could be included in each trade’s fair value,
and charged to counterparties.
The more proactive the stance taken towards
counterparty risk the greater the need to have
the right IT solution in place to handle the
quantification, pricing and management issues
that accompany CVA.
Reporting capabilities must incorporate two distinct
views - a consolidated view for the risk management
department or CVA desk, and the trader view.
The CVA desk or Risk Management department
tends to be primarily interested in aggregate
CVA figures, but would also need drill-down
capabilities to support the validation of the figures
and to enable them to answer requests from the
trading desks to approve new deals. Aggregated
views usually follow counterparty and instrument
hierarchies and must show the netting and collateral
agreements that are in place in a transparent
manner. If hedging is to be handled by a CVA desk,
CVA sensitivities must be provided.
Kondor+: Helping banks to meet changes in market practice and regulation
Traders are primarily interested in pricing (which
means knowing how much to add as CVA), current
CVA amounts and details of any defined limits.
They also need guidance as to which counterparties
are favored or should be avoided, and on whether
or not a new transaction will ‘pass’. Their most
important requirement is a quick response time.
A view of the counterparty hierarchy and details
of existing transactions, including collateral that
is already blocked, will help in mitigating default
risk and in detecting cases of possible wrong way
risk. If a trader is tasked with hedging counterparty
credit risk, then he/she will also need access to
CVA sensitivities.
New functionality within Kondor+, building on
the already extensive foundations for CVA, helps
customers to ensure full compliance with the new
Basel III requirements, by mapping the CVA charge
to the individual trade in Kondor+ and also showing
the impact on the P&L.
Kondor+ helps traders to make better trading
decisions and price correctly for CVA at the pretrade level, providing reporting tools for computing
the CVA, P&L and Greeks (PV01, CS01 and crossGammas) on ‘netting sets’. The ability to aggregate
these Greeks is necessary for managing and
hedging the resulting credit position.
For the CVA desk, Kondor+ enables CVA charges
to be allocated to the different trading desks and
trading books and enables the desk to manage
the overall CVA position. The ability to map the
CVA charge to the individual trade provides the
transparency and drill-down that is required today.
The new CVA functionality is fully integrated into
Kondor+. CVA charges can be imported from Misys
Global Risk (MGR) or an external system, or a simple
‘add-on’ can be done using a rules engine.
CVA/Basel III: A Snapshot
–– Creation of the CVA service
–– CVA charges can be imported from MGR or
an external system, or a simple ‘add-on’ can
be done using a rules engine
–– CVA charges can be computed at the pretrade level
–– CVA service can be called at the trade level,
or on a batch mode (end of day CVA charge
reporting)
–– CVA charges can be transferred to the
CVA desk
Forward Premium Quotations
This is a new convention - some of the swaption and FX OTC Option quotation
have moved form spot premium to forward premium quotation.
This new market practice was driven by two factors:
firstly, due to the new OIS Discounting changes,
there was no agreement as to how discounting
should be done; and secondly, as a result of the
increased awareness of CCR. If the premium is paid
on a spot basis and the counterparty defaults, then
a loss is incurred. If the premium is paid forward,
there is no credit risk.
Kondor+ now enables the management of forward
premiums for swaptions and FX OTC options.
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MISYS RECENT MARKET RECOGNITION
NUMBER ONE TECHNOLOGY PROVIDER
RISK TECHNOLOGY RANKINGS 2012
Number One Overall – All Categories
Number One Overall – Trading Systems
Number One Trading Systems – Equities
Number One Trading Systems – Rates
Number One Trading Systems – Forex
Number One Trading Systems – Inflation
Number One Pricing and Analytics – Equities
Number One Regulatory and Compliance Reporting
STRUCTURED PRODUCTS
TECHNOLOGY RANKINGS 2012
Number One Trading System – Credit
Number One Trading System – Cross Asset
Number One Trading System – Foreign Exchange
Number One Trading System – Rates
Number One Risk Management – Collateral Management
BEST TRADING PLATFORM BACK OFFICE
ASIAN BANKER TECHNOLOGY AWARDS
NUMBER ONE RISK MANAGEMENT
TECHNOLOGY PROVIDER
ASIA RISK TECHNOLOGY RANKINGS 2012
Number One All Categories
Number One Derivatives pricing and risk analytics
Number One Operational risk management
Number One Derivatives pricing and risk analytics – Equities
Number One Derivatives pricing and risk analytics – Interest Rates
Number One Derivatives pricing and risk analytics – Hybrids
LEADING SINGLE TECHNOLOGY
PLATFORM – PORTFOLIO, TRADING
AND RISK MANAGEMENT
HEDGE FUND JOURNAL AWARDS 2011
STRUCTURED PRODUCTS
TECHNOLOGY RANKINGS 2011
Number One Trading System – Equities
Number One Trading System – Interest rates
Number One Pricing and Analytics – Equities
BEST RISK MANAGEMENT INITIATIVE
ASIA ASSET MANAGEMENT AWARDS
ABOUT MISYS
Misys is at the forefront of the financial software
industry, providing the broadest portfolio of banking,
treasury, trading and risk solutions available on the
market. With 1,800 customers in 120 countries
our team of domain experts and partners have
an unparalleled ability to address industry
requirements at both a global and local level.
Misys was formed by the merger of Misys with
Turaz, which includes the award-winning Kondor+
product line. Combined they are able to address
all customer requirements across both the banking
and trading book businesses. Misys is the trusted
partner that financial services organisations turn
to for help solving their most complex problems.
Misys and the Misys “globe” mark are trade marks of the Misys group
companies. Copyright © 2012 Misys. All rights reserved.
Find out more at www.misys.com
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