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1 Murex has once again topped Risk s technology rankings, winning seven first places in this year s poll. But competition is ferocious, with Algorithmics and SunGard close behind in second and third place. By Clive Davidson, with research by Xiao Long Chen Race for the prize With jockeying for position across almost all categories, Risk s 2006 technology rankings reveal how keenly the vendors of analytics, trading and risk management systems are fighting for market share. Once again, Murex has topped the overall rankings, with first places in seven categories, including cross-asset trading and front- to back-office systems, second place in 11 categories and five third places. However, competition is fierce among the top firms, with Algorithmics close behind with six first places and SunGard in third place overall with four top spots. Maroun Edde, chief executive of Parisbased Murex, says the challenges faced by vendors in meeting the requirements of today s financial institutions have become more acute in the past year. For one thing, there is the technology infrastructure on which the application is built, its flexibility, security, ability to scale up and total cost of ownership. Clients are expecting considerably more in these areas than they used to, and tests to validate a system s architecture are more detailed and professional than before, says Edde. The investment required to develop and maintain an architecture that can exploit advances in technology is considerable, and the gap is widening between those companies that have made this commitment, and so remain at the forefront of the market, and those that have not and are falling behind. As a vendor, either you have made the investment and you are there, Every year systems change by a significant proportion, approximately a quarter or so, so every four or five years you are having to develop the equivalent of a new system Juerg Hunziker, SunGard or you are not, says Edde. Business content is another key issue it is becoming increasingly important to be at the cutting edge across all asset classes and functions. In addition, vendors are required to support clients in their ever-more aggressive time-to-market ambitions. As a result of these demands, and the large investments on the part of both the bank and the vendor to meet them, financial institutions are insisting on deeper and more committed relationships with system providers. Clients are no longer content to just buy a system from a vendor, implement it and have a loose relationship with the vendor, says Edde. They want us to be much closer to their organisation. On the one hand, when we roll out an implementation, they want us to share more risk; while on the other, we participate more in the development of their organisation. The vendor is increasingly being invited to participate in the strategic thinking by sharing analysis of long-term industry trends, says Edde. In turn, the client reveals its ambitions at an earlier stage, enabling both parties to discuss and plan 70 Technology December 2006

2 the development and implementation of new business proposals and the technology that will support them. Other vendors developing increasingly deep business partnerships with their clients include SunGard, Calypso, Misys, Sophis and Wall Street Systems all of which appear in the Risk rankings. The biggest gains in this year s survey have been made by California-based Calypso and Pennsylvania-based SunGard. Calypso has moved from sixteenth to sixth place in the overall results, with wins in credit trading and credit front- to backoffice systems, and top five finishes in nine other categories. Calypso s processing capabilities and scalable architecture have proved particularly popular in the burgeoning credit derivatives market, where the company counts Citigroup, Bear Stearns and Wachovia as some of its major clients. SunGard, meanwhile, has moved from eighth to third place in the overall rankings, with four top spots (including credit risk for trading and banking books and limit checking, credit analytics and structured products trading systems), nine second places and nine third-place wins. The company at last appears to be benefiting from its efforts to consolidate its diverse range of mostly acquired products. The Front Arena trading and risk system, which just three years ago was still marketed more or less autonomously, is now firmly within the SunGard fold, while the company s Panorama market risk, Credient credit risk, Reech and Monis analytics and other risk applications have been pulled together and rebranded under the Adaptiv label. Juerg Hunziker, president of SunGard s Adaptiv business unit, says the challenge of keeping up with the innovation and business development in the industry is formidable. Every year systems change by a significant proportion, approximately a quarter or so, so every four or five years you are having to develop the equivalent of a new system. The market is so dynamic that it is becoming increasingly important for the vendors and clients to be very clear on the scope of technology projects, and just what the vendor is expected to deliver, he says. In terms of pure technology, the answer to the challenges of increasing complexity of instruments, massive growth in volumes, pressure for ever shorter time to market with instruments, and faster pricing and risk calculations is grid computing large networks of low-cost processors operating in parallel. Many vendors of trading and risk systems, including Algorithmics, Misys and Sophis, have re-engineered their software to run on grids. This involves a lot of work as the applications need to be open and modular enough to allow slicing and dicing of libraries and algorithms which is greatly eased if they are based on service-orientated architecture, says Jean-Baptiste Gaudemet, a senior consultant with Paris-based Sophis. The next step is to partner with grid platform suppliers like New Yorkbased DataSynapse that provide large networks of low-cost processors to perform the calculations on. For all asset classes, the requirement for increased power is a major challenge, continues Gaudemet. More and more clients are showing an interest in grid computing, be it on Sophis proprietary calculation servers or on DataSynapse s grid. Nomura International recently went live with Sophis s Risque system on DataSynapse s GridServer. Although it surrendered the top spot in credit risk for trading and banking books and limit checking to SunGard, Torontobased Algorithmics remains the dominant risk management system supplier in the rankings. With six first places, including market risk systems, regulatory and economic capital calculation, operational risk assessment and key risk indicators, and collateral management, the company is a market leader across all risk categories. Algorithmics started out on the sell side, focusing in particular on first-tier banks. Now, the fastest-growing area of business for the company is on the buy side. Asset managers and hedge funds are adopting more complex strategies involving multiple asset classes and more structured products, so the quality Survey respondents by location (%) Asia/Pacific Insurance Asset management Canada/US Universal bank/diversified financial organistion Others Latin America South Africa Survey respondents by type of institution (%) Others Europe TECHNOLOGY RANKINGS 2006 Investment bank/brokerage OVERALL RESULTS Top technology vendors Rank Vendor 1st places 2nd places 3rd places 1 Murex Algorithmics SunGard Savvysoft Misys Calypso Imagine Fermat 1 2 9= Ci = Sophis = Reuters 1 11= SuperDerivatives 1 13 Numerix = Openlink = SAS = Wall Street Systems 1 1 risk.net 71

3 HNOLOGY TEC RA S 2006 ING NK Juerg Hunziker, SunGard of their risk and decision support systems is becoming more important, says Michael Zerbs, Algorithmics president and chief operating officer. The bigger of the buy-side firms prefer to have their own system installed inhouse, but the medium-sized institutions are looking more at what Algorithmics calls its managed services solution. Like an application services provision (ASP), the software is hosted by the vendor and is made available to customers online. However, clients have a more individually tailored version of the system at their disposal than with a pure ASP, says Zerbs. We pre-configure a specific set of analysis and views of risk and return to each client, he says. So far, broker- dealers such as Toronto-based TD Securities and London-based Marex Financial have been the first to adopt Algorithmics software in this way, but Zerbs expects there to be good take-up for this offering among buy-side firms. Many banks use Algorithmics software to help them comply with Basel II, and the new Accord continues to consume senior management attention as key deadlines of major Basel II projects approach. Among top-tier banks, the initial focus on Pillar I and its minimum capital adequacy is quickly evolving into a focus on Pillar II, use test requirements and the supervisory review, says Zerbs. Banks are looking at what they need for better stress testing. Pillar I doesn t How the survey was conducted Risk polled thousands of banks, hedge funds, pension firms, insurance companies and corporate treasuries for this year s technology rankings, and received 1,160 valid responses. Respondents were asked to vote for the technology vendors that provide the best product offering across a number of categories, including market risk, credit risk, trading systems, analytics and front- to back-office systems. Participants were asked to base their votes on functionality, usability, performance, return on investment and reliability. Nominated technology companies were awarded three points for a first-choice vote, two for a second-choice vote and one point for a third-choice vote. Only technology end-users were allowed to vote. Risk conducted a comprehensive due diligence process, and disqualified all votes deemed to be invalid. 72 tech rankings.indd 72 account for credit concentrations, for example. Once they start looking at these, and implementing economic capital models, the problem becomes how you compare these with the regulatory model, which is a key Pillar II issue, he says. Paris-based Fermat, which now has more than 45 banks using its Basel II credit system, in addition to more than 50 for its original Basel I market and credit risk system, pipped Algorithmics to the post in the rankings of Basel II systems vendors this year. Of the company s new Basel II customers, more than 20 are in production, including Allied Irish Banks, Fortis and Société Générale. The operational risk management requirements of Basel II have also forced many banks to look to third-party systems vendors for help. Making a strong showing in the operational risk categories in the rankings is Dublin-based Ci3. The company now has a partnership with SunGard, wherein SunGard labels Sword s application as BancWare OpRisk, giving Ci3 a channel into the banking market, while Ci3 offers SunGard s capital calculation engine BancWare Capital Manager to those clients that need this functionality. Ci3 is now concentrating on asset management and Technology December /11/06 4:42:33 pm

4 insurance, where in the latter market it has recently won major contracts with Swiss Re and Zurich Financial Services. Richard Pike, product manager for Sword at Ci3, says the different sectors approach operational risk management with different priorities. Banks are loss-focused primarily concerned with recording, understanding and mitigating their losses. Operational risk is the major risk for asset managers, so management controls are their priority. Meanwhile, insurance companies business is risk, so they want to do forward-looking risk assessments, he says. Overall, technology for operational risk management has matured to the point that there is now market recognition that fully fledged off-the-shelf products are available from the likes of Ci3, Algorithmics, Methodware and SAS, and that these can offer benefits over internal projects. Peyman Mestchian, head of the risk intelligence practice for Europe, Africa and the Middle East for SAS, says many financial institutions now see operational risk as more than just a regulatory requirement, and are taking a more strategic approach through enterprise-wide projects. Data management issues are coming to the fore, giving vendors that are strong in this area a competitive edge, says Mestchian. In the analytics categories, New York-based Savvysoft has performed strongly, topping the cross-asset, rates and structured product analytics categories, and fi nishing in the top five in credit, commodities and foreign exchange. The company also ranked fourth in market risk, giving it an overall position of fourth in the Risk rankings. Rich Tanenbaum, Savvysoft president, says that while excellence in modelling is a critical factor for a vendor, the quality of support offered by a company is also crucial. Vendors need to develop a trading floor mentality to providing support responding to queries and requests quickly and comprehensively, he says. Savvysoft has been getting more requests for help with meeting accounting standards, such as Financial Accounting Standard 133 and International Accounting Standard 39. Although these rules have been in place for a few years, auditors are becoming more and more insistent on hedge effectiveness testing, says Tanenbaum. To reduce the effort of keeping track of derivatives that have been executed as hedges, organisations want to automate the process hence the need for tools such as Savvysoft s Stars portfolio and risk management system. Savvysoft now has six users of Stars, and plans to offer the system as an ASP a delivery mechanism that is becoming common despite initial resistance. People begrudgingly accept ASP now, says Tanenbaum. Because ASP is a pay-per-use model, it has lower upfront costs. There are also lower maintenance costs as the vendor hosts the system. It is hard to turn away from the economics of it, he adds. However, users sacrifice a degree of control, and often have less ability to customise the system. It is also not unusual for ASP offerings to be merely cut-down versions of installed systems, with less functionality and power. Savvysoft intends for the Stars ASP to offer the same capabilities as its installed version. New York-based Imagine, which tops the rankings in equities trading and analytics, offers its customers an identical system, whether ASP or installed. As a result, its hedge fund and regional bank clients have access to the same capabilities as its big installed users such as Deutsche Bank and Dresdner Kleinwort. ASP users not only get the functionality they get a package of data and services that includes a securities master fi le, volatility surfaces, projected dividends and other essential data, as well as a service that maintains and updates the data, says Steven Harrison, president and chief operating officer of Imagine. The company can quickly add new pricing models or other functions to the system and make them immediately available to its ASP users. However, Imagine tries to provide tools for clients to adapt the system to their own needs where possible. Harrison says one of the strongest features of the system is a scenario control language, which enables users to create their own custom calculations as a column in a portfolio spreadsheet. So, as their strategies change or the market moves in different ways and they need to take a different perspective, they can create their own stress test or other analytics right in the portfolio, he says. Some institutions adopt an ASP as a cheap and effective way to test a system. For instance, a major investment bank fi rst licensed Misys Summit front- to back-office system for 15 users in ASP mode. When this proved successful, it increased its licence list to 70 users. Now it is in the process of installing the system in-house, says Edward Ho, chief executive of Misys treasury and capital markets division. For many vendors, developing new markets such as China and increasing business with the buy side are major focuses. Chinese banks are installing state-of-the-art technology as they look to compete against an influx of foreign banks into the country. For instance, five of China s leading banks, including Industrial and Commercial Bank of China, Bank of China and China Construction Bank, have implemented Misys Summit system. The success or otherwise of vendors in markets such as China, India, South America and eastern Europe is one of the major factors that could have an impact on Risk s technology rankings in Clients are no longer content to just buy a system from a vendor, implement it and have a loose relationship with the vendor Maroun Edde, Murex 74 Technology December 2006

5 MARKET RISK Market risk Number of companies cited: Algorithmics SunGard Murex Savvysoft Misys Imagine 5.4 7= Calypso 4.5 7= Sophis RiskMetrics Reuters 3.4 CREDIT RISK Trading and banking Number of companies cited: SunGard Algorithmics Moody s KMV Misys SAS 6.5 Limit checking Number of companies cited: SunGard Algorithmics Murex Calypso Misys 5.7 CAPITAL CALCULATION Economic Number of companies cited: 21 1 na Algorithmics SunGard Fermat Moody s KMV SAS 6.4 OPERATIONAL RISK Assessment and key risk indicators Number of companies cited: 19 1 na Algorithmics SunGard Ci SAS Misys 9.5 Internal loss database Number of companies cited: Ci Algorithmics SAS SunGard Misys 8.7 Capital calculation Number of companies cited: Algorithmics SAS SunGard Ci Misys 7.8 Regulatory Number of companies cited: 24 1 na Algorithmics SunGard Fermat SAS Misys 6.0 TRADING SYSTEMS Cross-asset Number of companies cited: Murex SunGard Calypso Misys Sophis 5.5 Credit Number of companies cited: Calypso Murex SunGard Misys Sophis Technology December 2006

6 Rates Number of companies cited: Misys Murex Calypso SunGard Reuters 6.2 Commodities Number of companies cited: Murex = SunGard = OpenLink Sophis = Reuters 5.6 FX Number of companies cited: = Reuters = Murex Wall Street Systems SunGard Misys 6.7 Structured products Number of companies cited: SunGard Murex Misys Calypso Sophis 7.6 Equity Number of companies cited: Imagine Murex = Sophis Sungard Misys 10.0 TRADING ANALYTICS Cross-asset Number of companies cited: Savvysoft Numerix Murex SunGard Imagine 7.9 Forex Number of companies cited: SuperDerivatives Murex Numerix SunGard Savvysoft 8.2 Credit Number of companies cited: SunGard Murex Numerix Savvysoft Calypso 8.5 Equity Number of companies cited: Imagine SunGard Numerix = Sophis Bloomberg 6.1 Rates Number of companies cited: Savvysoft Numerix Murex SunGard Calypso 8.0 Commodities Number of companies cited: Murex Savvysoft SunGard SuperDerivatives OpenLink Technology December 2006

7 Structured products Number of companies cited: Savvysoft Murex SunGard Numerix Misys 9.1 FRONT- TO BACK-OFFICE Cross-asset Number of companies cited: Murex SunGard Calypso Misys Sophis 9.4 Equity 17 companies cited 1 3 Sophis Murex Imagine SunGard Reuters 5.6 Credit Number of companies cited: = Calypso Murex = SunGard Misys Sophis 5.2 Commodities Number of companies cited: Murex = OpenLink SunGard Sophis Misys 6.7 Rates Number of companies cited: Murex Misys SunGard Reuters Calypso 7.8 Structured products Number of companies cited: Misys Murex SunGard Calypso Sophis 7.1 Forex Number of companies cited: Murex Wall Street Systems Calypso Reuters Misys 7.6 OTHERS Collateral management Number of companies cited: Algorithmics SunGard Murex Misys Lombard Risk 6.8 Basel II Number of companies cited: = Fermat Algorithmics = SunGard Misys SAS Technology December 2006