• Gerard Rafie

Modern Derivatives Desk: Do you have what you need?



This is part of a series of papers to bring transparency in what solutions should be delivered in a bank's Capital Market.

This publication details what functions/features to expect in a typical modern Derivative Front Office desk.

It brings clarity to an institution that is selecting a Derivative Front Office solution in what to have as a minimum. It also acts as a high-level roadmap checklist for software companies developing Derivative solutions or Consultants deploying a derivative solution.

I will split the document into Products and Functions.

Products (not an extensive list)

Interest Rates Derivatives:

  • Swaps Vanilla

  • Swaps Structured

  • Cross-Currency Swaps

  • Constant Maturity Swaps

  • Overnight Indexed Swaps

  • Future on Interest Rate Swap

  • Forward Rate Agreements

  • Interest Rate Futures

  • Options:

  • Cap/Floor

  • Cancelable

  • Swaptions

  • Callable

  • Range Accrual

  • Target Redemption

  • Spread Cap/Floor

Foreign Exchange Derivatives:

  • Spot and Forward (deliverable or non-deliverable)

  • FX swaps (deliverable and non-deliverable)

  • Window forward (including early take-up)

  • Averaging forwards (average-rate, average-strike, double-average)

  • Options:

  • Vanilla Options (OTC & listed; cash-and physical-settled)

  • Barrier Options (Single/Double)

  • Digital Options

  • Binary Options

  • Lookback Options

  • Asian Options (average-rate, average-strike, double-average)

  • Forward-start Options

  • Compound Options

  • Basket Options

  • Quanto payoffs (self and third-currency)

  • Scripted payoffs:

  • Target Redemption Forwards (TARF)

Equity Derivatives:

  • Equity Forward

  • Equity / Index futures

  • Listed Options

  • Vanilla OTC options

  • Vanilla OTC Basket Options

  • Equity swap

  • Volatility Swap

  • Barrier Option

  • Asian Options

Credit Derivatives:

  • CDS

  • CDS Indices

  • CDS Forward

  • Asset Swaps

  • Credit Index Futures

  • Syndicated Loans

Inflation Linked Products:

  • Inflation swap

  • Inflation Cap/Floor

  • Inflation Asset swap

Commodity Derivatives:

  • Vanilla (OTC)

  • Barrier Options, European (at expiry) and American (continuous)

  • Binary / Digital Options

Front-Office Tools

Pricing (Real-Time)

  • Single Trade

  • Strategies

  • Bundles

  • Cash Flow Structuring (amortization, annuities...)

  • Packages (linked trades)

  • Strips

  • Solving

Structuring

  • Scripted payoffs

  • Linked Notes (Funded and unfunded [swaps/options] payoffs)

  • Solving

  • Converting a cash structure into a packaged note

In addition to the standard valuation, pricing and structuring tools should provide the following:

XVA charges; Margin comparison (Cleared and Bilateral); Headroom check (Collateralized or not); liquidity ratio checks; and real-time pre-trade checks for compliance, market-risk limits, and credit-risk limits.

Trade Capture

  • Purpose: Sales, Prop, What-if, Internal, ...

  • KYC

  • Product Check

  • Classifications

  • Rules

  • Enrichments

Market Data

  • Publishing

  • Consuming

  • Management (cleaning, blending, rule based...)

Analytics

  • Curve and Surface Building Framework:

  • Pricing

  • Calibration

  • Collateralization (same currency, different currency)

  • Pricing Libraries (not extensive):

  • OIS Discounting

  • SABR

  • Shifted SABR

  • Black-Scholes

  • LGM

  • LMM

  • BGM

  • Vanna-Volga

  • LSV (local-stochastic vol)

  • Monte-Carlo when appropriate

  • American Monte-Carlo

Desk Risk

  • Sensitivity analysis

  • “What-if” analysis

  • Position analysis

  • Greek analysis

  • Cash analysis

  • Expiries analysis

  • Barriers analysis

  • Reset risk analysis

  • JTD analysis

  • Pin risk analysis

  • Horizon analysis

  • Hedge recommendations

P&L

  • Type of P&L:

  • Economic P&L

  • Flash P&L

  • P&L attribution

  • P&L explained

  • Detailed End of Day P&L [Realized, Unrealized, Accrual, MTM, Capital Gain/Loss, Transfer Pricing, Fees, Cost of Opportunity, Discounting Effects, Cost of Operations]

  • P&L Management:

  • P&L Sign-Off

  • P&L Sweep

  • P&L Adjustment

  • P&L Lockdown

Trade Support

  • Trade enrichment

  • Trade booking

  • Trade validation

  • "What-if" trades

  • Market Data validation

  • Trade Life Cycle Management:

  • Standard Market Life Cycles

  • OTC Life Cycles

  • Corporate Actions

Limits

  • Type of Limits (pre or post trades):

  • Credit Limits

  • Settlement Limits

  • PFE Limits

  • VaR Limits

  • Traders mandate Limits

  • Risk limits (Greeks)

  • Collateral Limits (Headroom check)

  • Liquidity Ratio Limits

  • Compliance Limits

  • Market Price Check Limit

  • Limit Management:

  • Violations management

  • Exception management

  • Freezing of Limits

  • Reservations

  • Hard and Soft Limits definition

  • Enquiries

Regulatory Capital Tools

  • VaR:

  • Historical

  • Parametric

  • Monte-Carlo

  • VaR Attribution

  • Back-Testing

  • Stress-Testing

  • FRTB:

  • Standard SA-MR

  • Advanced (Internal Models) MR

  • XVA:

  • Basic CVA

  • SA-CVA

  • DVA

  • FVA

  • KVA

  • CCR:

  • Standard SA-CCR

  • Advanced CCR

  • PFE Exposures

Sales

  • Executable pricing

  • Trader control over executable V/S RFQ pricing: size, tenor, customer

  • Structuring

  • Sales-Trader communications & negotiation

  • 360-degree view of client positions and risk

  • Automated term sheet generation

  • Sales management & reporting

  • Corporate Help Desk

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