Introduction A leading financial institution faced a critical challenge in servicing its corporate clients' derivatives needs. The existing coverage of EUR Cap/Floor incremental strike levels within their internal systems was insufficient, leading to inaccurate pricing, strained client relationships, and potential business loss.
The Challenge
Limited Data Coverage: The current data set for EUR Cap/Floor instruments lacked the breadth required to accurately price and manage these derivatives, particularly for less common strike levels.
Pricing Discrepancies: Insufficient data coverage resulted in inaccurate pricing, leading to discrepancies between the institution's internal valuations and market prices. This eroded client trust and hindered the ability to compete effectively in the market.
Operational Disruption: The lack of comprehensive data posed significant operational challenges for both front and middle office teams, potentially leading to order cancellations and increased operational risk.
Data Access Limitations: The institution had previously stopped trading directly with a key data provider (no access to Fusion), necessitating data acquisition through third-party banks.
Obstacles
Data Availability Uncertainty: The initial uncertainty regarding the availability of the required data within the institution's systems presented a significant hurdle.
Data Mapping Challenges: While the necessary data was identified, it was not mapped to the institution's internal systems (RMDS/Fusion), requiring a substantial mapping effort.
Data Delivery Constraints: Brokers agreed to release the data for direct delivery only, prohibiting distribution through common platforms like Bloomberg or Refinitiv.
Technical Limitations:
The institution's IT department had an upcoming freeze until the end of December 2024, necessitating the use of an interim solution until Q1 2025.
The institution's Risk & Business Intelligence team primarily utilizes Java, requiring the development of new scripts for data integration.
Time Constraints: The need to address these issues quickly was paramount to maintain client relationships and avoid potential business disruption.
Solution
Data Acquisition: The institution confirmed the availability of the required data within its systems.
Data Mapping: The Analytics team successfully mapped all 6000 new records (covering various collaterals, ESTR, EURIBOR, and tenors from 1Y to 30Y) into the internal systems.
Technical Implementation:
Developed a Websocket Java script to facilitate data integration.
Secured Websocket credentials for Q4 2024 to enable immediate data access.
System Integration: Ensured seamless data integration into Fusion for Q1 2025.
Outcome
Expanded Coverage: Successfully expanded EUR Cap/Floor coverage to include a wider range of incremental strike levels.
Enhanced Pricing Accuracy: Improved pricing accuracy for EUR Cap/Floor derivatives, aligning internal valuations with market prices.
Reduced Operational Risk: Mitigated operational risks associated with inaccurate pricing and data discrepancies.
Conclusion This case study demonstrates the critical importance of high-quality and comprehensive market data for financial institutions. By proactively addressing the challenges of limited data coverage and implementing a robust data integration solution, the institution successfully enhanced its ability to serve its clients, improve operational efficiency, and maintain a competitive edge in the derivatives market.
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