Wednesday, March 9, 2011

IR derivative trading system

IRS is the primary product in an IRD desk.

Major components of an IRD trading system - 1) booking/capture (b/c), 2) Risk/PnL. Actually, Risk is not a desk-specific system. Rather, deal pricing/risk analytics system is cross-asset and covers IRD, bonds, structured products, FX, and used to cover Credit.

B/C is the primary app for traders. For strategists, primary app is pricing/risk system (c++). For operations users, B/C offers STP confirms and settlement i.e. periodic payments.

B/C system actually expands to cover the full life cycle of a deal - resets, assignments, unwinds

Key object is a trade or a deal or contract. Firmwide risk engine and pricing engine (for IRS bids/offers) need these "positions". For real time risk and real_time_pricing, all deals need fast processing.

%Q: 2nd biggest product after IRS?
A: FRA, but we also trade cross-currency swaps, swaptions, caps/floors
A: There are flow IRD deals and exotic, "structured" instruments. Exotics are low volume, high margin. But momentum is in the flow business -- Growing volume. Arms race.

Even the commonplace contract in the flow business could be more complex than a stock/bond trade. Customer wants a tailor-made deal , so deal is complex - with 100+ attributes, compared to 20+ for trades by other desks.

IRS has no secondary market. The only way to get out of a contract is unwind.

There's regulatory pressure to clear IRS through a clearing house, possibly CME.

There's close link btw Treasury desk and IRS desk. When trader takes a T position, she (tries to?) immediately enters an IRS deal.

Flow IRD Margin is better than Treasuries and FX, and trade volume is lower.

IRD Contracts with collateral and margin might become more widespread when IRS gets standardized with a central clearing house. Right now, some of these contracts have daily revaluation and daily settlement, but in a separate margin account.

%Q: 24-hour?
A: no. Users sit in US, Europe, Asia, South America but NY is the last office to close the day.

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