Derivatives Systems

One of the latest and complex software systems in financial world is derivatives software systems. Though derivatives itself are not new to markets, there are many complex derivative products have been introduced in decade or so. Due to complexity and very low volume of OTC derivatives, total software solutions are not fully matured. Having said that I need to clear that the Listed derivative systems are quite matured. But systems to support OTC products need to catch up a lot. Though there are few well built libraries like FINCAD and others for pricing and valuations, systems to service end-to-end business needs are still not fulfilling their promise (more later on this statement).

As part of the series of posts, I would like to cover various topics on this subject starting from needs of derivatives business, systems architecture,  technologies, current market products etc.

To start, let us look at various features that derivatives system should deliver.


  • Valuation (Pricing) of Derivatives
  • Provide Portfolio Analysis Tools like P&L Calculations, VaR (Value-at-Risk), CVA (Credit Value Adjustments) etc
  • Mark-to-market positions and portfolios with multi-class asset products
  • Calculate various risk factors to assess Market Risk, Credit Risk
  • Calculate Business risk including VaR (types of VaR)
  • Provide tools for Scenario Analysis, Stress Testing
  • Support for multi-class asset portfolios
  • Ability to change or configure certain attributes of products
  • Easy integration with back-office systime like accounting, finance and other internal and external software systems
  • Ability to setup Straight-through processing (trade workflows)
  • Easy integration with Market data systems (external market data providers)
  • Support for industry regulatory and compliance requirements
  • Flexible, scalable and robust system

Now lets look at different types of users of derivative systems:

  • Derivatives Traders
  • Portfolio Managers
  • Risk Managers
  • Analysts
  • Corporate Treasurers
  • Accountants

Now its time to look at various types of financial institution that deal with derivatives. In a nutshell any institution small or big that manages money will have to manage the risk using some derivatives. Smaller institutions rely on their dealers or service providers for derivatives valuation, accounting and other functions. Here is the list of types of firms that mostly use some kind of derivatives systems.

  • Banks
  • Asset Management Firms
  • Asset Management Departments of Insurance firms
  • Hedge Funds
  • Corporate Treasuries of large businesses

There are many software systems serving derivatives field with limited features addressing needs of specific business functions. For example systems just doing derivatives accounting, valuation, risk analytics etc. Now lets look at functions of various business groups dealing with derivatives.

Corpoate Treasuries

  • Valuation of Derivatives – Compare dealer/counterparty prices
  • Assess Counterparty Expsosures and VaR (Value-at-Risk)
  • Assess Credit Risk (Counterparty Risk)
  • Perform Scenario Analysis and Stress Testing
  • Compliance with Accounting and other regulatory requirements

Asset Management

  • Pricing/Valuation of Derivatives
  • Portfolio Analysis – P&L Calculations
  • Portfolio Analytics – VaR etc
  • Scenario Analysis and Stress Testing
  • Risk Analytics – Calcuation of various risk factors position level and portfolio level
  • Trading Limits and Risk Control
  • Collateral Management
  • Accounting and regulatory compliance

Hedge Funds

  • Pricing/Valuation of Derivatives
  • Portfolio Analysis – P&L Calculations
  • Portfolio Analtics – VaR etc
  • Scenario Analysis and Stress Testing
  • Risk Analytics – Calcuation of various risk factors position level and portfolio level
  • Trading Limits and Risk Control
  • Collateral Management
  • Support for various Trading and Hedging Strategies
  • Support for building and customizing financial models


Broker/dealers would need a system provides everything above and much more. Most of the broker-dealers have different desks dealing with different class of products. This gives them more flexibility in building their own custom systems. Let my try to list some of the common desks and/or departments serving the derivatives business.

  • Equity Derivatives Desk / Listed Products Desk
  • Fixed Income Desk (Listed and OTC Products)
  • Credit Derivatives Desk
  • FX Desk
  • Risk Management Group
  • Collateral Management Group
  • Margining Group
  • Pricing and Evaluation Group
  • Operations Group
  • Prime Brokerage (Serving Hedge Funds and other asset mgmt firms)

These are just some names you come across, but actual organization structures vary from organization to organization.

Some of the top wall street broker/dealer firms are:

  • Goldman Sachs
  • JPMorgan Chase
  • Citi
  • Bank of America
  • RBS
  • Barclays
  • HSBC and other

In next post, I will start discussing the architecture of the system.

Hope this was useful.