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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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