SRP Apac Awards 2023: Murex capitalises on regulatory changes

In the structured product space, China has experienced a reform since the release of several regulations on standardising structured deposits and wealth management products in 2019. 

Typically, the structured deposits are principal-protected and bullet style with variable coupon rates based on the underlying performance - Fanchao Zeng

“With the increasing demand and popularity of structured deposits in the Chinese market in recent years, local regulators have required banks to establish a proper risk management system,” Fanchao Zeng (pictured), product manager, structuring and analytics, Apac, told SRP. “The legacy systems at some banks failed to price or handle complex structures. That’s how Murex began to play a role by offering both pricing and risk warehousing.”

He cited China Minsheng Bank (Minsheng), a client of Murex for more than a decade, which owned CNY7.6 trillion (US$1.1 billion) assets as at the end of March.

Last October, the Beijing-headquartered bank went live with the structured trade builder supported by MX.3 for its derivatives and structured deposits following a nine-month preparation. The structuring tool allows Minsheng to create linear combinations of payoffs and package them in a few clicks.

At Murex, the MX.3 platform is designed to integrate cross-asset trading, risk and post-trade operations. In China, it enables the banks to comply with both domestic and international requirements like the fundamental review of the trading book (FRTB) and the standard initial margin model (SIMM) based on a best-practice framework set up by Murex, according to Zeng. 

“Typically, the structured deposits are principal-protected and bullet style with variable coupon rates based on the underlying performance,” he said.  

Among a total of 25 payoffs, the top picks are call or put spread, staircase, shark fin, range accruals and autocall across foreign exchange (FX), precious metal, commodity, rate and equity.

The project has helped Minsheng streamline trading operations and consolidate market risk control, according to Li Jingwei, senior manager, market risk at the bank.

In Asia Pacific (Apac), approximately 70 financial institutions — mainly banks and securities houses — use Murex’s front-to-risk solutions across Japan, China, Taiwan, India, Australia, Hong Kong SAR, Singapore, South Korea, Malaysia, Thailand as well as Brunei and Indonesia. 

The client group covers nearly 400 desks by asset class, which comprise FX option, interest rate, FX cash, fixed income, securities finance, equity, commodity and credit derivative.

For the structured products priced on MX.3, the activities are driven by non-linear risk-free-rate (RFR) structures, China’s structured deposits, equity autocall and FX exotics, which are supported by 30 cross-asset structured product specialists and six quant analysts at Murex in Asia.

“Across Asia, clients with large derivatives portfolios use MX.3 LiveBook to get full intraday visibility on their risk and hedging,” said Alexandre Bon (above right), head of marketing, presales & go-to-market, Apac.

The module aims to provide traders instantaneous access to personalised monitoring dashboards of their positions, including sensitivities and user-defined risk measures with live position and market data updates.

From Libor to RFRs

Bon noted that the Libor discontinuation is also driving banks’ infrastructure investments in Asia as new products need to be packaged using RFRs, bringing new complexities.

“In Asia, some of our Japanese customers were the first to invest in developing non-linear and exotic structures using daily compounded secured overnight interest rate (Sofr) and Tokyo overnight average rate (Tona),” said Bon.

The adoption was shortly followed by Australia and Singapore before spanning the entire Apac region.

“The market for RFR-based structures is still growing and will remain an important driver for our risk and analytics solutions for at least another two years in the region,” he said.

Exotics in Japan

In Japan, FX-linked barrier products with a tenor of over 10 years are well received and deliver significant volume.

“The inconsistency between the market quote FX forward and historically-realised spot rate gives rise to the long-dated FX structures,” Zeng said. “It requires a market standard model which can match the market price of the exotics while at the same time perfectly matches the FX vanilla market quotes for up to 10 years.”

Moreover, the system must provide real-time portfolio management capabilities to support risk scenarios like spot ladder and smile analysis for large FX structure books in a timely manager.

In response, a new stochastic local volatility (SLV) model — TStar — was developed by Murex’s quant analysts based on its proprietary Tremor SLV model, which demonstrates “a more stable bucketed volatility risk [vega, vanna and volga] and more consistency with smile analysis”, according to Zeng.

For long, many small-to-medium-sized banks had been offering structured products to their clients on a ‘back-to-back’ basis across Apac - Alexandre Bon

The LiveBook module has also been applied by some derivative desks in Japan to access risk results of large FX structures book and monitor real-time position and market data update.

The SLV model will continue to be improved with a focus on the performance of model calibration through a hybrid graphics processing units (GPU) and central processing units (CPU) architecture.

UMR

According to Bon, Basel III’s initial margin requirement (UMR) framework, which aims to reduce the risk of derivatives exposures, also impacts the Apac market.

“For long, many small-to-medium-sized banks had been offering structured products to their clients on a ‘back-to-back’ basis across Apac,” said Bon.

Specifically, the banks choose to issue a structured note and fully hedge the exotic payoff by buying the mirroring derivatives structure from a global bank.

“This let [the banks] scoop a margin and leave their portfolio flat from a market risk perspective and they don’t need have the valuation capabilities from a narrow sales, trading and market risk management perspective,” he said.

However, the risk remains with both the bank and its counterparty and their exposures are determined by the value of each leg of the mirroring positions. Collateral management is one way to mitigate this risk, but the regular exchange of collateral requires that parties value the underlying positions, according to Bon.

“The small banks which did not have the valuations capabilities implemented our solutions with the SIMM and FRTB use cases in minds,” he said.

For larger players, all these new regulations represent additional friction costs for their structured products businesses, which has motivated them to move away from the plain back-to-back model.

“All these developments prompted a number of banks in the region to work with Murex to invest in risk and pricing capabilities for structured products,” said Bon.