ENGAGE18 Q&A: Brian Dunton on Streamlining Derivatives Operations

Eagle’s Head of Instrument Engineering, Brian Dunton, gives a preview of his presentation at ENGAGE18. The discussion will focus on the significant uptick in derivatives volumes among Eagle’s client base and how Eagle’s 2017 release adds features designed to support additional asset classes and improve client workflows.


Q: The use of derivatives by asset managers has been increasing steadily over recent years. You have year-to-date statistics showing that notional values of interest rate swaps and credit default swaps have increased by 40% and 69% respectively. Trade counts have also increased dramatically. What’s driving this? 

A: There are a number of factors driving the increased use of derivatives, but one of the largest is the historically low interest rate environment. This gives investors the opportunity to gain large market exposure at a low financing cost without using up their cash reserves.

Another factor is the large degree of standardization, through OTC clearing, that makes derivatives easier to trade and reduces counterparty risk. As a result, investors have become more familiar with these securities and incorporate them more readily into their portfolios. In an increasingly competitive market, investors are turning to derivatives as a way to drive alpha and beat the benchmarks.

Political and economic uncertainty—both at a national and global level—is also playing a role as investors look to hedge risk. Whether it’s the prospect of a trade war or the volatility we saw in the stock markets in February, which was exacerbated by margin investing, investors are anxious to mitigate these risks.

Q: What challenges does this present for asset managers?

A: As I see it, the main challenge is to ensure operations teams can handle these instruments. A trader may want to trade a specific derivative, but they may need to confirm that operations teams—and the rest of the firm—can handle them first. It’s generally at this point when our clients bring Eagle’s Instrument Engineering team into play.

It’s not uncommon that buy-side firms running older legacy systems don’t have the infrastructure to cope with derivatives trading. They often rely on multiple manual processes and spreadsheets, which quickly becomes unsustainable as volumes increase. So back- and middle-office executives are repeatedly coming to us in search of the more streamlined and integrated workflows that Eagle provides. A key value of Eagle is our ability to support the wide variety of derivatives, in addition to large volumes.

Q: How does the latest software release build on Eagle’s capabilities in the derivatives space?

A: Without going into very specific detail, the 2017 software release included several enhancements to further automate and simplify derivatives processing, particularly for more complex instruments such as total return swaps and contracts for differences (CFDs). We also made significant improvements to our cash and position segregation capabilities.

In addition to streamlining workflows, our expanded asset coverage now includes calculations for more exotic instruments with complex accrual calculations. We also enhanced our reference data tool to allow for the creation of user-defined templates for new instruments, introducing far more agility.

Alongside core software enhancements, our third-party strategic alliance program is helping to build out a broad derivatives solution set to meet clients’ needs. For example, increases in derivatives trading volumes and the number of instruments that require margin has caused organizations to refocus on collateral management. This led us to enter into a strategic alliance with a collateral management firm to offer clients a solution for the increasingly important (and visible) collateral management piece of the equation.

Q: What are you most looking forward to about ENGAGE18?

A: Almost everything we do is driven by interaction with our clients, and ENGAGE18 is the perfect forum for that. Talking with—and listening to—our clients to understand what and how they’re trading, what their volumes look like, and what their pain points are helps us to focus on areas for further product enhancements. We’re also constantly surveying the market landscape and staying up to speed on industry developments so we can serve as trusted experts for our clients. However, all the research in the world means little if it doesn’t translate to our clients’ actual scenarios. Since it’s our clients who actually make the trades, as their investment strategies evolve we need their input—and real-life data—to ensure that what we develop meets their business requirements.

Brian Dunton will present, “Derivatives on the Rise: Streamlining your Derivatives Operations using Eagle’s Latest Release”, at ENGAGE18, taking place at the Boca Raton Resort and Club, Florida, between 22-25 April, 2018. For more information, visit: www.eagleengage.com

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