Arrayo took on a transformative project for a major global financial institution. The institution’s traders faced a pressing challenge in accurately pricing interest rate instruments, encompassing treasuries, swaps, cross-currency swaps, futures, forwards, and various spreads. The existing system struggled to handle the vast array of market data required for pricing, resulting in suboptimal decision-making and risk management.
The Context and Challenge
Traders demanded a solution that could seamlessly and robustly acquire market data from diverse sources, including internal data, Bloomberg, Reuters, and intermediary brokers. They needed a tool that could generate zero rates for pricing both linear and non-linear instruments, employ proprietary multi-curve models and extensions, and apply various interpolation schemes such as tension splines and Tikhonov regularization.
Moreover, the institution sought to enhance its legacy systems, particularly Finastra Summit, to fetch, store, and manipulate data efficiently. Real-time zero rate operations, closing prices, risk calculations, and risk-based Profit and Loss (PnL) estimations for separate trades and portfolios were of paramount importance. Additionally, traders required support for Foreign Exchange (FX) Greeks and sensitivities calculations and a basic forecasting mechanism for interest rate behavior based on the basis Kalman filter and its extensions, utilizing various models of term structure dynamics.
What Arrayo Delivered
Here’s an overview of the solution we delivered:
- Interest Rate Pricing Platform Enhancement: We developed a cutting-edge Interest Rate Pricing Platform that seamlessly collected market data from various sources, including internal databases, Bloomberg, Reuters, and intermediary brokers. This platform became the central hub for IR related trading operations, providing traders with access to critical data required for informed decision-making.
- Zero Rate Generation and Pricing Expertise: To address the challenge of pricing a wide range of interest rate instruments, we integrated the functionality to generate zero rates and employed a proprietary multi-curve model and its extensions. The system utilized various interpolation schemes, including tension splines and Tikhonov regularization, ensuring precise pricing for linear and non-linear instruments.
- Legacy System Integration: We revamped the institution’s legacy systems, particularly Finastra Summit, to efficiently fetch, store, and manipulate data. This integration streamlined the flow of information, enhancing data accessibility and data management capabilities.
- Real-Time Analytics and Risk Management: The solution provided robust support for real-time operations generating zero-rate curves and closing prices, enabling traders to calculate risk and risk-based PnL for individual trades and portfolios. Comprehensive support for FX Greeks and sensitivities calculations was also integrated, facilitating enhanced risk management.
- Interest Rate Behavior Forecasting: To empower traders with foresight, we implemented a basic forecasting mechanism for interest rate behavior. Leveraging the basis Kalman filter and its extensions, along with various term structure dynamics models, the solution allowed traders to create additional views on expected interest rate movements.
The Value of the Solution Arrayo Built
The impact of our solution on the global financial institution’s trading operations was profound:
- Enhanced Decision-Making: Traders gained access to accurate and timely processed market data, enabling them to make informed decisions when pricing interest rate instruments. This resulted in improved trading strategies and profitability.
- Risk Mitigation: Real-time risk calculations and comprehensive support for risk management allowed the institution to mitigate potential financial risks, leading to a more resilient trading operation.
- Operational Efficiency: The streamlined integration with legacy systems and the automated data acquisition process increased operational efficiency, reducing manual data entry errors and saving valuable time.
- Competitive Advantage: With a state-of-the-art pricing platform, the institution gained an additional competitive advantage in the financial markets, attracting more clients and expanding their trading opportunities.
- Futureproofing: The solution’s adaptability and forecasting capabilities positioned the institution to thrive in an ever-evolving market environment, ensuring long-term sustainability.