Steve O’Hanlon, CEO of Numerix, chats with FTF News about the unclear regulatory road ahead and other industry matters.
(Editor’s note: In this Q&A, Steve O’Hanlon, CEO of Numerix, reviews some key trends and events of 2016, and looks forward to the rest of this year and beyond. For the road ahead, O’Hanlon foresees a lot of regulatory uncertainty, which will complicate many matters. Numerix won the Best Pricing or Valuation Solution award of the 2017 FTF News Technology Innovation Awards.)
Q: In 2016, what trends in pricing, valuation and related areas had the biggest impacts upon Numerix?
A: A real big one is the BCBS/IOSCO’s [Basel Committee on Banking Supervision/ International Organization of Securities Commissions] introduction of an increase in initial margin (IM) for non-cleared derivatives trades.
Cleared trades have long attracted initial margin but non-cleared trades have largely not.
Now that counterparties to non-cleared trades must post initial margin, the costs of dealing in non-cleared trades could increase substantially.
It’s based on the premise that OTC [over-the-counter] derivatives trades that are not cleared should face higher costs than cleared trades because they present higher risk. The phase-in period for this regulation started last year and it has implications from pricing, risk management, operational and regulatory perspectives.
For Numerix, it poses computational and analytics challenges, such as forecasting initial margin amounts, pricing the funding costs of initial margin into trades, and implementing any required technology changes into banks’ current systems.
Q: Were there any developments in 2016 that surprised you?
A: I’m sure 99 percent of people will respond the same way: Donald Trump being elected as the 45th president of the United States of America.
One of his main promises during his presidential campaign was to overhaul the Dodd-Frank Act, a massive and complicated piece of legislation.
A rollback of this bank regulation would potentially have significant implications in the U.S. and possibly across the globe.
Q: What changes underway in 2016 led to the acquisitions in 2017?
A: Last year, we saw significant growth in the emergence of fintech institutions in markets around the world, and not just in the U.S. and Europe, but in emerging economies as well. As a result, we are seeing a rise in fintech investments and acquisitions in 2017.
I find what is most interesting is the fintech development in emerging markets. We are seeing, for example, a focus on investments in fintechs that are developing technology to provide financial services to the unbanked and under-banked across Latin America. The focus in these areas is based around payments, international transfers, and P2P [peer-to-peer] lending.
Q: How would you describe Numerix’s business philosophy?
A: I describe it as succinct and fits in context with our mission and identity.
Our philosophy is this: We have a duty to our clients to provide outstanding capital markets technology solutions and real-time intelligence capabilities for trading and risk management, with the objective of enabling clients to rethink their complex business challenges in more transparent and profitable ways.
This promise must always be driven by a culture rooted in a deep dedication to creating breakthrough technology and the pursuit of continuous, leading-edge innovation.
Q: What predictions do you have for the regulatory landscape in 2017 and beyond?
A: There’s really quite a lot of regulatory uncertainty as we look toward the next few years, so we can’t really make predictions about the near- or long-term regulatory landscape.
But one issue that is obvious is the overriding uncertainty over which way regulations will go.
Will regulatory criteria end up being more relaxed? What are some of the elements that could change? Conversely, what are the elements that are unlikely to change?
Despite any predictions, banks will have no choice but to develop a strategy for implementing current and any upcoming regulations. The big question mark is whether banks follow a hard-line interpretation of rules as they are set out now, or go with a more relaxed interpretation, anticipating a regulation scale back.