Free Financial Risk Management

By Olivier Asuncion, CEO and Founder of Tradista.

For many companies, it is often challenging to manage financial risk. Financial markets are increasingly more complex and the financial products being offered are broader. Companies need to be better equipped and better informed of the financial ecosystem they are transacting in.

Larger companies have departments managing their financial operations, including management of financial risk. Smaller companies often lack the resources to manage these risks internally so their financial operations are delegated to banks acting on an advisory basis. This can be problematic. Through the introduction of technology, smaller companies can access solutions to manage their finances in-house.

Tradista reviews the possible challenges faced by smaller companies and how they can be mitigated.

Infrastructure Management

Installing and managing third-party IT applications can be a challenge for small companies. Servers need to be purchased and personnel recruited to install and maintain the application (or alternatively engage external IT teams). Financial markets are constantly changing: new regulations and new financial products. Consequently, software upgrades and potential bug fixes need to be managed, often at a significant cost for the maintenance involved.

Cloud is now a mature technology. EC2, Elastic Compute Cloud, part of Amazon.com’s cloud-computing platform, Amazon Web Services (AWS), which was introduced in August 2006. Likewise, Google and Microsoft alongside other providers have launched similar solutions. The cloud industry has successfully overcome challenges induced by the transformation it represents, security being the main concern. These platforms now offer a high level of security: secured communications, secured storages and rigorous data access management models.

Data Management

Data management was another concern. Companies must have control of where their data is stored, especially for regulatory reasons. It is also important to control access and to easily back-up, restore and recover files. Advances in technology and the legalities surrounding cloud storage have improved so each of these areas of concern can be addressed.

Companies using cloud solutions can choose where data is stored and permit access, maintaining the same level of control had the data been stored on internal infrastructure. Technology can also allow the movement from a public cloud to a private cloud and vice versa. It is not necessary to commit to an external provider without the flexibility to change and standards exist to facilitate this. As an illustration, Jakarta EE is a standard for Cloud-based enterprise applications.

Price Clarity and Affordability

Small companies buying new software need clear and affordable pricing. Cloud, agile methodologies and internationalization of the economy have contributed to reduced production costs and distribution of software. Software providers must be transparent with their pricing but properly recompensed for their intellectual property. SaaS is increasing in popularity and using this model, customers pay for software usage, not the software itself. Companies can control their expenditures, paying only for what is used.

Market data

The pricing model for Market Data has often been considered too opaque for the financial software industry. Market Data is at the heart of financial software and the basis for valuation processes. Initially controlled by a few key providers, access to data is now more readily available, depending on the type of market data required (access to some data is still carefully controlled by a small group of providers).

Types of market data required to run financial risk management software

To control its exposure to foreign currencies, Foreign Exchange rates (FX rates) are required when a business engages in a financial transaction outside of its currency zone. Today, it is possible to receive live and historical FX rates for free. Many options are available, including paid options, although the free services will be largely sufficient for smaller companies wanting to check their FX exposure.

Market data is also invaluable when managing interest rate risk, namely yield curves. This may be particularly useful when managing floating rate loans or deposits. Several Central Banks calculate and publish yield curves for free. For software that creates yield curves, the cost of getting bond prices has decreased in recent years and is becoming more affordable. Whilst the data for FX rates has been democratized, this is not the case for yield curves which rely on underlying bond price data to build these curves.

Extensibility

Whilst standardization is important when building software, some clients have very specific needs or constraints and prefer to leverage a single software for management of their finances. It is hence important for financial software to provide these extension points. These extensions points should be provided cautiously:

• They should not break the internal software model, being consistent with the core features; and
• Software upgrades must remain simple – even with complex customizations (an area where numerous software providers are failing).

APIs have been in the spotlight these past few years and indeed, if well-designed, APIs can become a suitable solution for capabilities extension. A complementary approach is to design software so it is easily configurable and adaptable to different contexts without further required development. Use of APIs require skilled IT teams – a skill-set which many companies do not have immediate access to. By combining configuration capacities and well-designed API, a software can be made customizable at will and at little risk.

The diagram below presents a decision tree when a software must be customized to meet specific needs:

Financial Software and Versatility

Companies using financial software want to avoid dependency on an external provider, software editor or integrator. Business requirements change and companies should not have to be entirely dependent on the external provider lifecycle and their internal decisions. The technical versatility of a software plays a key role: software should be designed so it can be seamlessly moved to the cloud or on premises, quickly and safely. Technical versatility is also related to the technical choices made when the software was designed.

Payments

When using a financial risk management software, the customer receives indicators driving their decision to buy – or not to buy – financial products to cover identified risks. Some of these products include, for example, FX Forward, FX Swaps or IR Swaps.

Solving one of the biggest challenges faced by the industry

A small company that has decided to buy such products should be able to confirm the transaction through the software. To facilitate this, a standard is required, allowing OTC transactions with the company’s bank. Open Banking, an initiative that started in 2013 after the European PSD 2 regulation, requires banks to provide public APIs for the services they offer. Open Banking is a positive move for the industry, however, standardization is also a key, and already, standardization efforts have been made in the European Union and in the United Kingdom.

Without standardization, a software can become an aggregator of heterogeneous APIs so the end user can connect with several banks. However, this aggregation is hard to maintain and can be inflexible. Standardization of these APIs will allow companies to connect with any bank and will free-up payment capacity for small and medium companies.

About Author:

Olivier Asuncion is specialized in IT project management and software engineering, with 16 years of experience in the financial industry.

He has a double Financial/IT skill obtained from two Master degrees coupled with his experience, made of several roles as software engineer, consultant and project manager across Europe.

These last years, he has been a Lead Consultant for Calypso Technology, managing in particular the Calypso Upgrade Practice, which aims to help clients upgrading their Calypso implementations.

Leveraging on his experience, he founded Tradista in 2018, which is a cloud-based financial risk management solution dedicated to Small & Medium businesses.

About Tradista

Tradista is a French financial software provider, specialized in small & medium businesses. Its main solution is a cloud-based financial risk management platform dedicated to SMEs, that has received several distinctions in 2018 and 2019.

Tradista’s model is based on software craftsmanship, where quality of the delivered solution is always the priority. Its team is made of enthusiast and experienced professionals from the financial industry.

Tradista has been a solution member of the Eclipse Foundation, a participating member of the Jakarta EE Working Group and is member of the ecosystems “La French Tech” and “La Place”.