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3 posts from April 2015

30 April 2015

Enterprise Data Management - The Next Generation

Hi folks, there is a recording up of a webinar I took part in yesterday with the A-Team. The webinar was called Enterprise Data Management - The Next Generation and involved discussion about what's needed and what's next in EDM. You can get access to it via this link.

21 April 2015

FTF News Awards 2015 - Xenomorph's TimeScape EDM places 2nd and wins Gold Standard Award

Xenomorph is honored to announce today that is a recipient of the FTF Gold Standard Award with a 2nd place finish for TimeScape EDM in the category of ‘Best Enterprise Data Management Solution’ in the FTF News’ 2015 Technology Innovation Awards. While we feel our Timescape EDM solution is unrivaled by our peer competitors, we congratulate all the participants and remain committed to providing the best data management solutions on the market, helping our investment banking and asset management clients to reduce data costs, improve data quality, and to build a long-term foundation for regulatory reporting and making better business decisions.

Presented by Financial Technologies Forum and FTF News, the Technology Innovation Awards recognize information technology firms and service providers in the financial sector as well as industry professionals that have made significant strides and noteworthy achievements in operational excellence during 2014. The ‘Best Enterprise Data Management’ category recognizes the providers that have successfully applied effective data management capabilities via new or updated offerings for middle- and back-office operations and facilitate advances in straight through processing (STP).

At Xenomorph we believe that successful business requires data that is fit for purpose and easy for all to analyze. This guiding principle has led us to develop software solutions for financial markets that enable both technologists and business users alike to manage, cleanse and analyze more data, more quickly. As such, we are proud to continually be on the forefront of enterprise data management innovation with our TimeScape EDM solution, and our cloud-based data publishing service, TimeScape MarketPlace. In 2014 we focused on adding browser-based data cleansing, validation workflow and full audit capabilities to TimeScape in order to bring TimeScape EDM to market. Now with existing and new clients already benefitting from using TimeScape EDM for regulatory compliance, we believe that TimeScape EDM is unrivalled in enabling our clients to support any kind of data requirement, any type of asset class and to fully integrate analytics as part of an auditable data management process.

As we look ahead through 2015, our goal is to continue to reimagine how firms can more easily manage, analyze and monetize data seamlessly. We want our clients to spend less time manually validating data and more time understanding the data, in order to accelerate regulatory compliance, streamline their operations, and bring innovations of their own to the marketplace.

And finally, a huge thank you to all of you who voted for us!

02 April 2015

GARP - Value, Financial Innovation and Regulation

I went along to a GARP event on Monday night, held at the Harmonie Club in NYC. The event was introduced by Stefan Magnusson, chapter co-director of GARP and MD Market Risk Americas at Rabobank. Jeremy Josse was the main speaker, doing a talk entitled "Value, Financial Innovation and Regulation" loosely based around his book "Dinosaur Derivatives and Other Trades".

Jeremy started by a quick introduction to himself, describing how he has worked for many financial institutions during his career, but his educational background also included philosophy and economics too. He suggested that much of risk management was about the math and the technical aspects of risk management, whereas he was going to focus more on meaning rather than the underlying detail. Like many an Englishman (!) he almost seemed apologetic for suggesting this but to bare with him as he pulled various strands of thought together.

Starting with Dinosaur Derivatives, Jeremy wondered whether there could be value today in a derivatives contract or option to buy a Megalodon. Given that a Megalodon is an extinct species of giant shark, you would think not given that physical delivery might be a problem. That said, Jeremy thinks there could be a market in such an option due to:

  • Brokers - generating demand
  • Control of supply
  • Liquidity - some illiquid assets trade at a 30% premium to illiquid ones
  • Arbitrage - based on some expectation of selling at a higher price
  • Habit

Jeremy then listed off some other assets and considered their value:

  • Gold - no utility in this asset glass, reputed as a "safe-haven" asset
  • Diamonds - again no fundamental utility
  • $ - a fiat currency built on "trust" with no underlying asset, with fiat currencies being used first in China around 1000 years ago
  • Contracts for Difference - again no intrinsic value to this asset class
  • Internet/Social Media stocks - Jeremy thinks we are in internet bubble 2.0 with group think leading valuations astray

Looking at the Theory of Valuation then the comparison of market value versus intrinsic value is really analogous to technical analysis (charting/trending) versus fundamental analysis (balance sheet etc). Jeremy mentioned the Efficient Market Hypothesis (EMH) and said that anyone that has worked in the markets knows that EMH is not adhered to in the real world i.e. assets do not always reflect all information known about them. In particular Jeremy sees the work of Scheleifer and Shiller in behavioral finance as one of the most interesting areas of financial theory to work in, with the potential to quantify "irrationality". Jeremy put forward the following three choices that an individual could choose in terms of what money they would receive and what money another individual might receive:

  • $100 (me) and $0 (you) - some choose this but not all; we are not all greedy
  • $80 (me) and $80 (you) - most choose this but not all; we are not profit maximizers
  • $0 (me) and $150 (you) - a few choose this but not all; we are not all generous

Moving on to the Credit Crisis, Jeremy said that this was caused due to the mispricing of assets such as CDOs/CLOs and CDS. This mispricing was caused by complexity and a lack of transparency but such characteristics are fundamental to the nature of financial innovation. As an aside, Jeremy mentioned that smaller regional banks tend to trade at higher multiples than say universal banks due to investor perceptions of greater transparency of what is going on and what the risks are.

So moving on to Financial Innovation, Jeremy asked firstly what a financial instrument is?:

  • Rights - to future cashflows etc
  • Contractual strings/permutations - choice but leading to complexity
  • Epicycles upon epicycles - derivatives but more general dependencies and links
  • Some form of legal fiction - to arbitrage regulation and prohibitions

Jeremy talking around prohibition (aka modern regulation) being a driver of innovation, starting in history with the prohibition of usury leading financial innovation to find ways of replicating the returns of interest payments but without there being interest payments, so maybe leasing or buying goods receivable at discounts. Looking at the timeline of financial products through history:

  • Loans - available in Babylonian times
  • Stocks - available in Roman times
  • Convertibles - developed as a form of finance for the creation of the US railroads in the 19th C
  • Derivatives - back to Babylon again with property options
  • Securitizations - late '90s
  • CDS - late '90s

 Considering the Logic of Financial Innovation, Jeremy said that most professional disciplines used either Empirical Testing or Deductive Inference to innovate and check that something "worked" as such. But really there is no "social laboratory" for financial innovation or indeed for the regulation intended to control/shape it, so most things, including additionally macro economic policy, were implemented without prior testing. Jeremy said that financial innovation is both critical to our economies but also very vulnerable due to this lack of testing. 

Back to the Credit Crisis, Jeremy said that 10 years running up to the crisis were the social laboratory for CDO/CLO/CDS products but these were mispriced due to a lack of testing. This was a major cause of the crisis but such innovation (and lack of testing) is fundamental to the nature of financial innovation itself. Coming forward to today, securitization is now better understood, biases by rating agencies have been controlled and counterparty risk is being reduced through clearing. So put another way, financial innovation has a stormy creative period where a new product morphs and evolves and pushes the limits of what people, corporations and governments find attract or acceptable, until these limits are pushed too far and a crisis ensues - then finally maturity comes with experience and better understanding of the risks.

Jeremy is a collector of Antique Maps, which he says have become an interesting asset class and listed their history:

  • 1970s - emerged as a new asset class
  • Asset subject to wild price movements/patterns of behavior
  • Now an established art form

Initially dealers would visit libraries containing maps (notably Harvard in the US) and simply rip out pages from it. The market had misrepresentations of authenticity (lying), theft, short-selling, insider trading and many other dubious practices. This initial period of innovation was very destructive without regulation, but now antique maps are an established art form and asset class. So there is a real dichotomy between this destruction that eventually led to people seeing ancient maps as things of beauty, collecting them and hanging them on their wall. 

So why are Regulations needed? Jeremy said that regulation was needed to control:

  • Dysfunctional patterns of behavior
  • Extreme value fluctuations - primarily due to greed
  • Wealth distribution - implementing social justice
  • Bubbles
  • Financial innovation

But what is the Right Kind of Regulation? Jeremy said that we should not hand over "The rule of law to the rule of lawyers". He said there had been 100 years of regulation, with a lot of focus (particularly in the US) on rules that micro-manager what institutions can and cannot do, built up on closing the door after each fraud/incident. Here he talked of Dodd-Frank with all of its detail but particularly gave time to say he thought that the "Living Wills' regulation was a work of fiction and of little practical use - he quoted Hemingway who said that "You go bankrupt slowly then quickly".

Jeremy believes that Principles-Based Regulation is a better solution - although I would say that this proved no better looking at the UK vs US regulation through the crisis? He advocates taking politicians out of the rule making, with judges making decisions based upon case law as it builds up over history. The issue of enforcement seems to loom large here, even if principles could work, they will not work with enforcement. Jeremy pulled up a diagram showing arrows between Value, Financial Innovation and Regulation showing how intertwined they were. He suggested that "vexatious" litigation (the contract must cover every eventuality) was a problem in US regulation in particular. More fundamentally, creating regulation prior to knowing its effects was extremely difficult, since society and economies are not bounded games, unlike chess say where a computer can evaluate all possibilities. 

There were some audience questions, firstly on the viability of bitcoin which Jeremy was negative on, saying that without trust, value can disappear and that "our" electronic money only works because it is backed by governments. Another question talked about the SIFIs and Jeremy said he favored breaking them up over more regulation to control them.

In summary, Jeremy was a great speaker with some good ideas. As he said, most were common sense but I guess his main point was that financial innovation would not happen if it is regulated too quickly/too harshly. So new financial innovation can be destructive and painful, but regulation itself can stifle innovation and the creation of value and new markets.

 

Xenomorph: analytics and data management

About Xenomorph

Xenomorph is the leading provider of analytics and data management solutions to the financial markets. Risk, trading, quant research and IT staff use Xenomorph’s TimeScape analytics and data management solution at investment banks, hedge funds and asset management institutions across the world’s main financial centres.

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