OTC Derivatives System Debuts with Razor Edge on Competition

By Ben Mattlin

In March 2008, New York-based International Derivatives Clearing Group was designing a clearing system for trades of over-the-counter interest-rate swaps and other fixed-income derivatives. An independent subsidiary of NASDAQ OMX Group, the world’s largest securities exchange company in total market value of its listed securities, IDCG had to bring efficiency and transparency to what’s currently estimated to be a $419 trillion market worldwide.

“We needed a platform that could calculate risk at the speed of market transactions, in a complex and ever-changing environment,” recalls Gerry Lawlor, IDCG’s chief technology officer (photo right).

Time was of the essence. IDCG had to pass regulatory clearance with the U.S. Commodity Futures Trading Commission by year-end in order to go live in 2009.

After considering several risk-management software makers, IDCG chose Razor Risk Technologies, a Certified Microsoft Solutions Partner, and provider of a real-time risk-assessment and risk-management platform that was rigorous enough to process changes over time and under a broad spectrum of scenarios.

“What Razor Risk brought to the table was its ability to do all that quickly and comprehensively, spanning our entire structure of accounts – traders, allocation accounts, margin accounts, clearing members and so on – and monitor the broad-based, ever-shifting risks continuously,” says Lawlor.

Besides being able to meet IDCG’s technological requirements, the Sydney, Australia-based Razor Risk, a publicly traded company, “understood the OTC market and specifically what we needed to do,” adds Lawlor.

It was small and nimble enough to get the system running, including integrating the risk platform with existing software that handled transactions, within IDCG’s narrow timeframe.

Integrating the system wasn’t especially difficult. “Razor’s open interface simplifies integration of data with existing trading and clearing systems,” explains Malcolm Warne, president of Razor Risk Technologies for the Americas (photo left).

Staff training wasn’t much of an issue either. Razor Risk professionals worked with IDCG’s own in-house team in an ongoing partnership. “We still have four of their people permanently based here with us,” notes Lawlor.

Still, with regulatory approval looming, the combined team had to “move at breakneck speed,” says Lawlor. “This meant we had to be very pragmatic in our decision-making, but our vision was well understood and never really changed. Getting into production was more paramount than sweating the nitty-gritty.”

One key to success was laying out incremental steps from the outset. “From the beginning, we agreed about what needed to be done by when and by whom, and that enabled us to track very smoothly and stay on budget,” Warne says.

Of course, there were milestones along the way to benchmark progress. “The initial scoping and planning session enabled us to meet our promised deliverables and track against budget,” he adds.

To accomplish that, the implementation crew was able to set aside concerns about specific potential problems in large part because the Razor platform is highly configurable. In fact, a key to the success of the project was building flexibility into the system.

“We knew we were going to have to adapt to the different requirements of our diverse client base,” Lawlor notes. “We needed to be able to adjust while still working within a structured framework, to quickly accommodate the variety of needs that would arise. Clients come in with different account structures, and I can change Razor on the fly to accommodate that.”

The built-in flexibility is considered vital to maximizing client comfort. Customers of all stripes can execute derivatives contracts exactly when and how they wish.

Indeed, making sure the platform would pass regulatory approval was the single biggest hurdle. “We were under the microscope as we were configuring and implementing the system,” says Warne. “The CFTC has a well-defined process for gaining approval, but we had to provide documentation about the software and demonstrate that the technology was sufficiently robust.”

IDCG worked with the regulators to “make them feel comfortable with the risk-management policy” while Razor Risk helped the agency become “comfortable with the technology underpinning that,” Warne continues. “It wasn’t a simple process, but it went smoothly.”

Sure enough, approval was given in December 2008, just six months after work began and two weeks before the International Derivatives Clearinghouse, an IDCG subsidiary, went live.

From here, with the technology firmly in place, IDCG’s primary focus is on getting more fixed-income derivatives market participants to use the system. “We’re going after the second largest market in the world,” says Lawlor. “We’re still in the early stages but there’s no reason why it couldn’t grow well beyond its current size.”

IDCG isn’t alone in this optimistic assessment. In June, Bank of New York Mellon Corp. acquired a minority stake for an undisclosed sum.