Bob Park, ceo and co-founder of FINCAD, answers SCI's questions

Q: How and when did FINCAD become involved in the structured finance markets?
A: FINCAD is a 20-year-old company. Our core competence is building financial analytics for valuation and risk measurement.

We have been selling software for the last 19 years and over that time we have licensed our software to 4,000 different organisations in more than 80 different countries. Very early on we tried a more panoramic approach to analytics, whereas other companies were focusing on just one narrow asset class.

From the outset, we have built analytics to work across all the asset classes. We have tools to work with bonds and bond derivatives, commodities, equities and FX derivatives. In the late 1990s and early 2000s we started covering credit derivatives. A lot of our clients use our technology for interest rate products and a growing number are using our credit products.

We have three product families: our classic, function technology products under the FINCAD Analytics Suite; our structured products F3 brand; and an online offering where users can enter their portfolios and obtain independent valuations.

The analytics suite products have become an industry standard. We have a very diverse clientele, which includes all sorts of banks - from Wall Street firms to small savings banks - as well as hedge funds, non-financial corporations, quasi-governmental agencies and accounting firms.

Our F3 products are also pure analytics. In the mid-2000s we realised that the function-based technology would not meet the needs in the structured products area, so we put a team together and gave them the mandate to start afresh with a completely clean sheet. They started their design work in 2006 and we have just released two significant products under the F3 brand; one is F3 Excel Edition and the other is F3 SDK.

F3 is an entirely new approach for FINCAD to financial analytics and we were able to avoid a lot of the pitfalls that other companies go through because of legacy technology that has to be incorporated. It is highly flexible and you can define virtually any trait and it is configured to use Monte Carlo simulations in a computational grid. So it is grid-enabled from the outset and it is completely transparent, which is becoming an increasingly important factor in financial reporting, along with traceability tools through cashflow reports and audit logs.

Aside from those two pure analytics families, we also have an offering that allows users to enter their portfolios and obtain independent valuations. This is an online solution that embeds our analytics in our software-as-a-service offering and gives them the ability to enter their portfolios and receive values.

The system is integrated with daily market data from some of the world's leading sources and that gives them the ability to generate valuation reports either on an ad hoc basis or they can schedule them and have valuation reports sent to a distribution list - whether that is the compliance people, portfolio managers, etc.

Q: What are your key areas of focus today?
A: Our core competency is providing state-of-the-art tools for valuation and risk measurement. We look to do that across the entire asset spectrum, so we were ahead of the curve when a lot of analytics vendors specialised in one asset class or another. We continue to be unique to some degree in that we offer very comprehensive coverage across all the asset classes, while in each of those asset classes our coverage is very comprehensive.

We are beginning to get more traction in the structured markets as a result of F3. It is all about giving people accurate numbers both for valuation purposes and for risk assessment. Going forward, this unique risk technology embedded in F3 will get a lot of traction in the middle office for risk managers, but because of the granular detail it also gives traders the tools they need to hedge out exposures that they do not want in deals they are contemplating.

Q: Which market constituent is your main client base?
A: Historically we have been strongest in interest rate derivatives. I would guess between 50% and 55% of our users are working in interest rates and fixed income, including a growing number which are also using credit derivatives as a result of their activities in those two markets.

Once we get past the interest rates, fixed income and credit, then it is fairly evenly divided between equities and commodities. We have energy companies, agricultural producers and consumers, electricity companies, oil and gas, and a lot of metals companies.

This diversity has been a real asset at certain times in the market. The ability to move into different industry segments has been a real strength for us.

We were popular fairly early in the hedge fund industry as a number of traders moved out of banks to set up hedge funds or join hedge funds because those guys were already familiar with our tools. One of the great things about our business is that people move around in the financial industry and there are some clients we have sold our technology to multiple times over the years.

The other thing is that, because of our geographical diversification, if things go a little stale in one part of the world then the chances are there are going to be other opportunities elsewhere. If things go a bit flat in one industry segment, then we have others we can go to and do business with.

Q: How do you differentiate yourself from your competitors?
A: In the past we have done it on the basis of quality and value. We are able to add a very significant differentiator with F3; this F3 technology is quite different. It is the first 21st Century object-orientated analytical platform and, because it is legacy-free, we have been able to take advantage of some of the technologies that just were not available before.

Being grid-enabled from the beginning is important because one of the key lessons from the financial crisis is that value-at-risk is not a panacea as a risk management tool. Therefore, increasingly risk managers are turning to scenario analysis. In the context of large financial organisations with large portfolios, running multiple scenarios is very time consuming and resource intensive, so by having F3 enabled to run on massive computer grids, large financial institutions are able to run multiple scenarios.

F3, because it is so efficient and grid-enabled, will provide a significant edge in terms of running multiple scenarios. That, coupled with the very granular risk reporting that we provide, has the potential to change the way risk management is done because it provides information risk managers have simply not had before.

There are a number of innovations in this technology that will impact front, middle and back offices. The flexibility it provides gives the front office the ability to define any trade, so they do not miss an opportunity in the market, because some opportunities are there for a very short period of time. In the middle office this comprehensive risk information is going to give people much better information for risk management.

Q: Which challenges/opportunities does the current environment bring to your business and how do you intend to manage them?
A: The dominant theme is the uncertainty caused by not knowing what the regulators are going to say. The good thing for us is there is a new focus on risk management and the inadequacies of how it was done up until the financial crisis.

I think we are going to see increasing budgets in the risk management area and we are already seeing the middle office having significantly increased influence in most financial institutions. In terms of the challenges, I think that there are a lot of people feeling very uncertain about the potential effects of the new regulations, especially with respect to the bespoke derivatives contracts and how that will affect use of capital.

Another challenge is that banks will struggle with margins going forward. Central clearinghouses can be used to deal with a significant part of the simpler derivatives markets. It may lead to customers being more willing to use simple products because of the greater comfort they will feel thanks to central clearing facilities.

In the structured markets there has been a real pull-back from exotics, which will not last. I think what is going to happen going forward is people will get yield hungry again and start looking for ways to pump up their yield, and a way to do that will be structured products.

Another area which holds potential for the future, provided the industry can improve its record of disclosure, is in retail structured products. These were taking off just prior to the crisis but then there were some real horror stories. Provided disclosure rules are improved, people will be able to make more informed decisions about the risks they are taking on in order to get a 7% yield instead of a 3% yield.

But there is huge pressure on the regulators, certainly in the US. These guys have been called on to do more work than they have done for the last 15 years! It just sounds impossible.

The time pressure involved means that mistakes will be made and there is a really good chance of unintended consequences. Hopefully, they will be easy enough to fix, but it only adds to the uncertainty.

JL