Asian institutions strive to become better modellers of derivatives
The search for yield is seeing Asian institutional investors taking on more multi-asset class and pan-jurisdictional positions, while a drive for greater risk management is increasing the usage of OTC (over the counter) derivatives, and as a result many Asian institutions are upgrading their systems.
Matthew Streeter is the capital market strategist and product marketing manager at FINCAD, and he explains why conditions in the Asian market are leaving it ripe for expansion.
FINCAD is a Canadian software provider, specialising in tools for derivatives analytics and risk valuation. It has decided to focus more on regions like Asia. According to Streeter, “even though we have seen pockets of growth in various business lines in the US and Europe, we see a lot of potential for growth from Asia with the expansion of the derivatives market.”
Streeter highlights the recent ISDA (International Swaps and Derivatives Association) annual general meeting, which saw Asian OTC derivatives tipped for strong growth. “I agree with that. I think that OTC derivatives are here to stay. A lot of Asian firms are now using complex derivatives as hedges as solutions to complex business challenges.”
However Streeter underlined that this usage was focused on OTC derivatives for hedging rather than investment, and explained that, for example, an insurer hedging the risks on an insurance portfolio with futures might not be able to achieve the same level of customization and will suffer from hedging precision.
In Asia, Streeter also notes that, “We’re still seeing growth from banks, but the really significant growth is in the asset management space, hedge fund managers and traditional asset managers.”
The impact of recent regulatory changes around the world is also having a big impact, both for the buy- and sell-side, with Streeter highlighting Basel III and the increased costs of trading and investment management that are resulting from its higher capital requirements and funding costs.
“There are huge regulatory implications, that fall across the board. There’s no one company or jurisdiction untouched, and firms are taking [the extra regulatory requirements] as an opportunity to overhaul their architecture and technology. It’s implementing a new paradigm for the way they run their business, but it’s also about competitive advantage and enhancing risk capital,” says Streeter. “For 30 years it’s been about a single calculation of VaR (value at risk), but now they’re trying to take a more holistic approach to managing risk.”
Streeter adds that: “And for the first time these institutions are taking on these multi-asset positions. A lot of asset managers looking for yield in numerous asset classes and different financial instrument types.”
Streeter notes that Asian institutions – and institutions in regions like Africa and the Middle East – are benefitting from technological leapfrogging, and are adopting international-level technology systems to catch up with peers in the US and Europe. He also notes that there can be advantages for smaller or newer institutions in terms of implementation, due to the lack of existing legacy systems, larger multinational funds do benefit from having greater numbers of staff for implementation.
“It’s difficult to get yield, so they invest in various geographies, but they don’t want to take on more risk, they want to have greater comfort. There were a lot of portfolio managers that didn’t have good awareness during the financial crisis,” he says.