FINCAD Annual Buy-Side Survey 2011

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FINCAD Annual Buy-Side Survey 2011

  1. 1. Annual Buy-Side Survey<br />FINCAD 2011<br />
  2. 2. Accurate Risk Assessment, Independent Pricing Remain the Biggest Challenges for Buy-Side<br />Summary<br />30% of buy-side respondents reported that accurate risk assessment was their biggest challenge. Most respondents planned to make some adjustment to their risk management strategy. The most popular adjustments included greater analysis and awareness of model risk (52%) and carrying out stress testing and scenario analysis (50%). The most important type of risk analysis used by the buy-side respondents was Monte Carlo VaR (40%).<br />Another challenging area listed was independent pricing and valuation (28%). To help meet this challenge, respondents used multiple sources for their valuations including in-house systems (46%), counterparty pricing (45%) and using spreadsheets (43%). When looking for an OTC valuation solution, transparent, documented models and easy to use/implement topped the list.<br />
  3. 3. Accurate Risk Assessment, Independent Pricing Remain the Biggest Challenges for Buy-Side<br />Summary<br />With all of the regulation changes taking place, it was no surprise that 57% of the buyside respondents felt that there would be a moderate or major impact on their business. Only 13% felt well prepared.<br />ŠŠMost buy-side respondents (54%) expected to spend more on IT in 2011. Systems and tools need to be updated in order to meet the needs of an ever-changing marketplace.<br />
  4. 4. OTC derivatives and fixed income common in buy-side firms<br />The majority of respondents have OTC derivatives (73%) and fixed income (89%) instruments in their portfolio. Almost half (47%) report that they plan to increase their OTC derivatives usage, while only 3% thought it would decrease. This follows the general trend we have been seeing in the industry. In last year’s survey, only 41% reported an expected increase, while 10% felt they would be using fewer derivatives.<br />
  5. 5. OTC derivatives and fixed income common in buy-side firms<br />Do you have fixed income in your portfolio? (n=493)<br />Do you have OTC derivatives in your portfolio? (n=493)<br />Yes<br />No<br />Other<br />29.8%<br />24.7%<br />46.7%<br />Yes<br />No<br />Other<br />73.2%<br />89.0%<br />9.1%<br />23.6%<br />
  6. 6. OTC derivatives and fixed income common in buy-side firms<br />Do you expect your percentage of OTC derivatives usage to increase or decrease <br />in 2011? (n=493)<br />29.8%<br />50.7%<br />2.6%<br />46.7%<br />Increase<br />Decrease<br />Stay the same<br />23.6%<br />46.7%<br />
  7. 7. OTC derivatives and fixed income common in buy-side firms<br />Similar to last year’s survey, respondents are most heavily trading Interest Rate, Fixed Income and Equity instruments.<br />What types of derivatives are you heavily trading? (n=493)<br />7.7%<br /> 56.4%<br /> 23.9%<br /> 13.0%<br /> 57.8%<br /> 53.3%<br /> 41.4%<br /> 32.0%<br /> 10.1%<br />Hybrids<br />Interest Rate<br />Commodities<br />Energy<br />Fixed Income<br />Equity<br />Foreign Exchange<br />Credit<br />Other<br />
  8. 8. Structured products used by one-third<br />Only one-third of the respondents are generally trading, structuring, supporting, or selling structured products in their current role. The majority (73%) of respondents reported Fixed Income as being part of their structured products portfolio. The next most popular asset classes were Equities (48%), Rates (46%) and Credit (44%).<br />8.1%<br />
  9. 9. Structured products used by one-third<br />Are you trading, structuring, supporting, or selling structured products in your current role? (n=487)<br />What asset classes are used in your structured products portfolio? (n=161)<br />Credit<br />Commodities<br />Equities<br />Foreign Exchange<br />Fixed Income<br />Rates<br /> 44.1%<br /> 21.1%<br /> 48.4%<br /> 32.3%<br /> 73.3%<br /> 46.0%<br />66.3%<br />Yes<br />No<br />33.7%<br />
  10. 10. Most widely used sources for valuing OTC derivatives<br />Multiple sources are used to value the OTC derivatives in their portfolio. The most commonly selected methods were in-house systems (46%), using counterparty pricing (45%) and spreadsheets (43%). These were also the three most popular methods reported in the survey last year.<br />How do you currently value your OTC derivatives? (n=449)<br />Counterparty pricing<br />Spreadsheets<br />Off-the-shelf software<br />In-house systems<br />Other<br /> 45.4%<br /> 43.4%<br /> 27.8%<br /> 45.9%<br />16.7%<br />
  11. 11. Most widely used sources for valuing OTC derivatives<br />When looking for an OTC valuations solution, respondents felt that easy-to-use/ implement (78%) and transparent, documented models (77%) were the most important features. Comprehensive coverage (69%) was the third most important element.<br />
  12. 12. Most widely used sources for valuing OTC derivatives<br />What do you think are the most important elements of an OTC derivatives pricing solution? (n=423) <br />1=Not at all important; 5=Very important<br />Comprehensive coverage<br />Strong support services<br />Transparent, documented models<br />Easy to use and implement<br />Risk management capabilities<br />Cost effective<br />Other<br />1<br />2<br />3<br />4<br />5<br />
  13. 13. In-house risk management systems<br />79% of the respondents reported having a risk management system, which is higher than last year where only 71% of respondents reported this. This would reflect the general focus on risk management that we have seen in the industry.<br />Do you have the following in-house systems? (n=449)<br />TreasuryManagementSystem (TMS)<br />TradingSystem<br />RiskManagementSystem<br />Asset/LiabilityManagementSystem<br />Yes<br />No<br />
  14. 14. Risk assessment reported the biggest challenge<br />30% of respondents felt that accurate risk assessment was their biggest challenge. In this year’s survey, 28% reported independent pricing/valuation was their biggest challenge, down slightly from last year’s survey in which 32% cited this as their biggest challenge. Regulatory compliance has become a little more important to the group – in this year’s survey, 11% listed regulatory compliance as the biggest challenge compared to 8% the year before.<br />8.1%<br />
  15. 15. Risk assessment reported the biggest challenge<br />Using Monte Carlo VaR was seen as the most important type of risk analysis (40%) for respondents.<br />What is the biggest challenge you currently face with respect to derivatives? (n=423)<br />What type of risk analysis is most important to you? (n=449)<br />7.8%<br />Monte Carlo VaR<br />PFE (Potential Future Exposure)<br />EPE (Expected Probability Exposure)<br />CVA (Credit ValueAdjustment)<br />Other<br />None<br />Independent pricing/valuation<br />Accurate risk assessment<br />Hedge effectiveness<br />Regulatory compliance<br />Transparency in financial reporting<br />Other<br />17.3%<br />7.6%<br />16.3%<br />11.1%<br />12.5%<br />7.8%<br />29.6%<br />16.3%<br />6.6%<br />39.6%<br />27.7%<br />
  16. 16. Risk assessment reported the biggest challenge<br />Respondents cited greater analysis and awareness of model risk (52%) and actively carrying out stress testing and scenario analysis (50%) as the primary ways that they were adjusting their risk management strategy.<br />What steps have you taken to adjust your risk management strategy? (n=449)<br />Heavy investment intoRisk Management<br />Greater analysis andawareness of model risk<br />Implementation of independent valuation methods<br />Actively carrying out stress testing and scenario analysis<br />We haven’t made any adjustments<br /> 36.3%<br /> 51.7%<br /> 39.0%<br /> 49.7%<br />17.8%<br />
  17. 17. Impact of regulatory changes<br />As the regulations get finalized, it seems that respondents are expecting more of an impact on their business. 58% of respondents think regulations will have a moderate (43.3%) or major impact (14.4%) on their business area. This is up compared to last year, in which only 42% or respondents thought there would be a moderate or major impact. Those who felt well prepared for the regulatory changes dropped only slightly from 15% in the 2010 survey to 13% in 2011.<br />How significant of an impact do you think regulatory changes will have on your business area? (n=423)<br />No Impact – we are well-prepared<br />Small impact – some minor changes will need to be implemented<br />Moderate impact – notable changes will be required<br />Major impact – significant changes will have to be made to accomodate new regulations<br />43.3%<br />14.4%<br />29.8%<br />12.5%<br />
  18. 18. Growth expected in front and middle office<br />The front office was the area expected to have the most growth in 2011. 38% of respondents listed front office as the growth area, while 33% said the middle office was the area to significantly expand. This is similar to last year’s survey results.<br />What division within your organization do you expect will experience the most significant expansion in 2011? (n=421)<br />Front office<br />Middle office<br />Back office<br />Other<br />16.9%<br />33.3%<br />11.9%<br />38.0%<br />
  19. 19. IT spending expected to increase in 2011<br />More buy-side respondents expected to spend more money on IT in 2011 than they expected to 2010. 54% of respondents expected to increase spending in the 2011 survey, while only 51% felt this way last year. Only 7% of respondents expected a decrease in IT spending this year compared to 15% who expected this last year.<br />What are your expectations for IT spending throughout 2011? (n=419)<br />6.7%<br />39.6%<br />Spending will increase<br />Spending will decrease<br />Spending will remain the same as in 2010<br />53.7%<br />
  20. 20. Methodology<br />FINCAD conducted an online survey of 541 finance professionals from buy-side firms around the world. The survey took place throughout April 2011. Respondents worked in the following types of organizations:<br />7.9%<br />Asset Manager<br />Hedge Fund<br />Pension<br />Insurance<br />Fund Administrator<br />Other<br />18.7%<br />19.6%<br />4.4%<br />9.1%<br />40.3%<br />
  21. 21. About FINCAD<br />Founded in 1990, FINCAD provides advanced modelling solutions built on award-winning, patent pending technology.  With more than 4,000 clients in over 80 countries around the world, FINCAD is the leading provider of financial analytics technology, enabling global market participants to make informed hedging and investment decisions. FINCAD provides software and services supporting the valuation, reporting and risk management of derivatives and fixed income portfolios to banks, corporate treasuries, hedge funds, asset management firms, audit firms, and governments.  FINCAD Analytics can be accessed through Excel, MATLAB, as a Software-as-a-Service or embedded into an existing system through software development kits.  Now, over 70 FINCAD Alliance Partners embed FINCAD Analytics within their solutions. FINCAD provides sales and client services from Dublin, Ireland, and Vancouver, Canada.<br />For more information on how FINCAD is helping buy-side firms with many of the challenges expressed by this survey, visit: www.fincad.com<br />

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