Calypso’s vision to transform capital markets

Calypso’s Chief Product Officer, Pedro Porfirio, and Chief Technology Officer, Tej Sidhu, discuss their ambitious plans to transform capital markets technology

The Background

The Great Depression is among the most severe financial crises ever. The stock market crash on Black Tuesday made it patently clear to both politicians and regulators that comingling investment and commercial banking exposed tax payers to excessive risk taking, and in 1933 Congress passed the Glass-Steagall Act.

But as the memory of the Depression faded and the U.S. economy enjoyed an extended stretch of unprecedented growth, attitudes about banking regulations changed. They were no longer viewed as essential safeguards – rather, they were seen as business impediments.

It’s easy to understand why. The rate of innovation and automation in finance was amazing, most of it fueled by technology. We saw explosive growth, with consistent double digit returns on equity. Weathering crashes, like the bursting of the Internet bubble in 2001, gave the impression of robustness while securitization, implying sustainable spreading of credit risk, pushed it even further.

Commercial banking saw huge improvements in operational efficiency with general ledger systems, ATMs, Web access, and electronic payments, but they did not apply to investment banking. Innovative new investment banking businesses with large revenues increased margins and drove profits.

“We believe technology is not only the key to satisfying the regulators, but also to creating a healthier, more profitable industry”

The focus was on time-to-market with cost being a secondary concern.

Regulations and protective measures were gradually repealed, and investment banks were allowed to acquire commercial banks (and vice-versa). These so-called “bulge bracket” banks morphed into large, complicated, opaque institutions with asymmetric compensation policies. It was a recipe for short-sighted, risky, and unreasonable behavior, creating the conditions for their own demise and culminating in the excesses that triggered the financial meltdown of 2007. Nine years later, we’re still recovering from the Great Recession, with anemic economic growth in many countries, low inflation (and interest rates) across the globe, and negative yields for much of the world’s publicly available debt.

Post-Crisis Regulation

Given this backdrop, it is not surprising that regulators have been extremely proactive since 2007. In their efforts to shore up the recovery and prevent another catastrophe, they have created a regulatory landscape that is extensive, sophisticated, and complex. The current batch of rules – Dodd-Frank, EMIR, Basel III, etc. – make the original Basel regulations published almost 30 years ago look like a children’s story book.

It is too soon to determine whether their efforts will succeed, but it is clear that the new rules are having a material impact on the banks they regulate. New reporting and control requirements, capital constraints, and increased costs – combined with competitive pressures – have challenged institutions’ profitability. Good returns on equity in 2016 now hover at around 8% – approximately half of their pre-crisis levels.

A common objective among the new wave of rules is establishing a global view of the banks’ business. Regulators want to be sure that there are no surprises lurking in the recesses of their operations or their balance sheets. It’s a laudable goal, but it is not easy to achieve given the industry’s reliance on fragmented systems and manual processes from the pre-crisis era.

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Technology Transformation

We believe technology is not only the key to satisfying the regulators, but also to creating a healthier, more profitable industry. IT is generally the second largest line item at a bank, behind only its payroll. The C-suite has historically focused on time to market, resulting in fragmented technology ecosystems. This was okay when things were growing; now it is holding the industry in a stalemate.

Failing to acknowledge the change in the marketplace will not make the problem go away. Much like the car manufacturers in Detroit in the 90’s, banks need to tackle their fundamental issues: quality and costs. The car manufacturers have shown us that a turnaround is possible.

Calypso believes that financial markets are the grease that keeps the economic engine firing on all cylinders. Banks are the key players – their main function is to facilitate the efficient allocation of assets in compliance with regulations. Allowing banks to stay focused on this critical function is what drives Calypso.

The Calypso Vision

Our vision begins, of course, with the software. Calypso Technology was founded with the mission of providing the most complete cross-asset, front-toback system in the capital markets, and we continue to relentlessly pursue that objective.

But that’s not enough. It is time for capital markets technology to migrate from the provisioning of software that automates current processes to the creation of a common operating model where standard critical functions can be executed as a utility. That’s why we created Bank-in-a-BoxTM. By providing our clients with a standardized, prepackaged, target operating model, Bank-in-a-BoxTM encapsulates the vital steps and processes for each major capital markets function – eliminating duplicate, flawed workflows.

The market also demands innovation in how technology platforms are designed and deployed. CIOs today are under tremendous pressure to provide increasingly differentiated business capabilities, at substantially lower costs, while adapting to the constantly shifting regulatory landscape. Agile architecture with streamlined deployment, standardization of commoditized processes, and on-demand consumption are all key elements of technology platforms that will be needed for the most successful capital markets participants to thrive.

These three components: an advanced software platform, standardized target operating model, and a cloud-enabled deployment model together form the core of our vision to create a solution ecosystem that helps transform the industry. Standing alone, each is useful, but all three in concert are revolutionary.

Calypso is investing to make this vision a reality and we believe we are uniquely positioned to deliver it.

The Software: Version 15

Calypso continues to advance the state-of-the-art in business functionality and Version 15 is the latest iteration in that pursuit. Built on Bank-in-a-BoxTM, Version 15 continues our push for standardized and efficient solutions to the critical challenges facing banks today. There may be a long road ahead, but with the help, feedback, and engagement from our clients, we intend to make this journey a shorter one.

Version 15 is headlined by the Front Office Workstation, with passive and active market data viewers, real-time ticking P&L, and bespoke pricers. Through the workstation, clients will be able to see P&L for linear and vanilla option products instantaneously using Calypso’s pricing-cube technology, empowering swifter decisions and better understanding of trade implications. We are publishing white papers explaining our standard valuation methods that are system-independent.

“It is time for capital markets technology to migrate from the provisioning of software that automates current processes to the creation of a common operating model where standard critical functions can be executed as a utility”

For regulatory capital, Version 15 will have updated Basel III compliant risk calculators. Counterparty credit risk and FRTB compliance is paramount, and 2017 is right around the corner. The risk library generates capital requirements using standardized methodologies for both market and counterparty credit risk, with standard APIs that allow clients to use data from Calypso or other systems. We also have the technology, using Calypso’s data grid, to help our clients implement advanced capital calculation methods. Regardless, our focus is on making this challenging task an easy one. When coupled with the advanced analytics for equities, credit, F/X and rates – particularly powerful in curve building and option metrics – we’ve created unrivaled breadth, depth, and efficiency in risk and collateral management.

For the back office, Version 15 is focused on reducing TCO to meet, and exceed, cost efficiency mandates. At the core of the back office components is a new workflow, with task station and chasing tools (compliant to regulations) to boost operational efficiency and cut costs, and an STP settlement manager. The back office processing platform handles all components from confirmation and client statements to assignment and corporate actions. Calypso’s Back Office offering is unsurpassed in flexibility, while also offering standard Bank-in-a-BoxTM set up for most processes.

Target Operating Model: Bank-in-a-BoxTM

Just as the car manufacturers in Detroit had to redefine their manufacturing practices and change their culture, banks need to reinvent the way they operate. With a growing number of financial products either becoming exchange-traded or cleared, processes are becoming standardized. While valuation engines have become more sophisticated even for linear products, they are becoming increasingly mature and standard. Processing financial transactions is paramount to banks, but it is hardly a competitive advantage. In fact, it is a hurdle.

At Calypso we live to provide innovative solutions, and believe there is nothing more important than helping our clients streamline processes that can be automated using a standard approach. Standardized operations provide transparency for auditors and compliance with regulators, are scalable, and allow banks to focus on their core business while simultaneously decreasing costs.

Drawing on 19 years of experience servicing over 200 clients in over 66 countries, Calypso Technology has created a target operating model called Bank-in-a-BoxTM. Combining pre-configured software, extensive documentation, and standard operating procedures, all built in collaboration with our customers, it simplifies implementation and standardizes operations. We believe Bank-in-a-BoxTM is the solution for many of the challenges facing banks today, allowing them to get back to focusing on their clients.

Deployment Model: On Premise and in the Cloud

Version 15 brings substantial new business functionality and is also the foundation for a new approach to deliver these capabilities to the market. We are moving to radically simplify the way customers consume the capabilities of our platform – decoupling and decomposing the platform into layers that can be independently provisioned and consumed as needed. Providing capabilities that are both on-premise and on-cloud, we aim to free our customers from the industry’s typical install and upgrade cycles, allowing them to focus on business-critical services while removing the cost from standard, but necessary, low value-added business processing.

“We are moving to radically simplify the way customers consume the capabilities of our platform – decoupling and decomposing the platform into layers that can be independently provisioned and consumed as needed”

The Front Office Workstation is a lightweight, trader-centric, rich desktop application with a minimal technology footprint. New, componentized elements can be added and functionality extended quickly. Taking this further, we are moving the Calypso front office to be independently upgradable from the middle and back office so new business functionality can be provided at the speed the front office requires without having to upgrade the entire stack.

With Basel III, IOSCO, clearing mandates, and numerous other regulations, we have invested substantial amounts in helping our customers meet regulations. Meeting regulations, however, can impose substantial operational and infrastructure costs on the organization. Even if you meet the target, regulations are defined by change. What if there was also a way to rapidly adapt to regulatory change while leveraging a solution that’s validated by the market? Calypso is making this a reality by deploying a suite of cloud-based services: standalone, discrete web services that can be consumed dynamically by the Calypso platform, bespoke systems, or even in Excel directly from the desktop. Capabilities like the Calypso SA-CCR (Basel committee’s standardized approach for measuring counterparty credit risk exposures) cloud service allow customers to meet the looming Basel regulations with speed and with minimal technology footprint.

Calypso has always had the leading back office processing solution in the market. Providing both technology and business process outsourcing, the powerful functionality of the Calypso Back Office solution will soon be available as a cloud-based utility. By leveraging Bank-in-a-Box™, customers can dramatically lower their costs and improve STP rates allowing the utility to handle the commoditized portions of the business.

The Future

The evolution of Calypso will continue to anticipate and reflect the needs of our global client base. Capital markets technology can no longer rely on the architecture (or lack thereof) for trade processing we strived for in our earlier days. While the price tag of making changes to core infrastructure might be high, it might be the only way to survive.

Calypso Version 15 provides a major step forward in delivering on this vision, but it hasn’t happened overnight. We have been investing for years to enable this vision. Rigorously standards-focused, and built purely on Java, we have continually evolved the platform, investing in scalability, monitoring, and deployment – decoupling and enhancing the core architecture while relentlessly adding business capabilities. We have a secure, cloud enabled SaaS offering with numerous live customers. We have built a robust web services backend and modern HTML5-based web apps, allowing banks to provide self-service capabilities directly on their customers’ desktops.

We are committed to enabling our customers to become more efficient, more agile, and more profitable. Deploy Calypso fully on premise, leverage Calypso cloud capabilities, or opt for a hybrid model. The choice will be yours. Maintain control of the most critical components of your infrastructure, focus your best resources on providing value to the customer, and lower the cost of standard operations.

Capital markets demand agility and efficiency. Calypso Technology is investing to provide both.