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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