Old Bonds, New Pillars

Two months into the year, the third pillar of Solvency II—which requires insurers operating in Europe to do aggregation and reporting of risk-weighted assets across both internal and third-party asset managers' portfolios—is creating quite a stir among French companies and their asset-servicing providers alike.

The reason why is unclear, but one could safely surmise that one driver is time: the first deadline for these requirements coming into force, January 2016, is less than one calendar cycle away, right about when firms traditionally begin to freak out.

As my colleagues over at Inside Reference Data, who have doggedly covered Solvency II, would tell you, this work has been going on for some time. And its development could make a real impact on the broader risk analytics space going forward, with Europe's larger securities services providers suddenly finding themselves on the front foot.

French Connection

For example, as Jean Francois Marchand at Societe Generale's Sec Services told IRD's Joanna Wright, it's fairly striking that France's major public reinsurance provider, Caisse Centrale de Reassurance (CCR), recently signed up with the bank to run its solvency capital requirements (SCR) calculations.

For BNP, Soc Gen, and a handful of others on the continent, it seems like Solvency II is the catalyst for upending—or at least saturating—this high-end institutional segment of the analytics market. Colle says his team is aspiring to compete with BlackRock Solutions, which means they're either dreaming or deadly serious. I'm guessing the latter.

"I cannot say it is something commonplace," he told her, pointing out that—up to this point—organizations of this variety have usually bought a solution and run it internally, rather than outsource it altogether.

As the year progresses on, though, that could well change—in fact it already is, in another corner of La Défense. When I spoke with BNP Paribas' Sec Services CEO Patrick Colle a few weeks ago, he noted the bank's Solvency II solution specifically as an area of focus.

The bank is beefing up its risk analytics with a large in-house team of quants, known as IRP, and Colle mentioned a number of large European insurance clients who not only came to better cope with the regulation, but also employed new risk management decisioning—with savings to the tune of billions of dollars in cost of capital—by using BNP's platform, as well.

For BNP, Soc Gen, and a handful of others on the continent, it seems like Solvency II is the catalyst for upending—or at least saturating—this high-end institutional segment of the analytics market. Colle says his team is aspiring to compete with BlackRock Solutions, which means they're either dreaming or deadly serious.

I'm guessing the latter. 

Smoothing Relations

Dan DeFrancesco also wrote late last week about another, more acute relational challenge asset management giants are now eyeing, using methods known as algo switching and alpha profiling.

Converse to Solvency II's recent puzzle, alpha profiling attempts to solve a problem as old as electronic trading, itself (and maybe older). Incorporating real-time market data and analysis of historic trading habits, it aims to better harmonize portfolio managers' needs with traders' various execution strategies, particularly as trades are designed with multiple legs and spread out over time and multiple venues.

We've heard about the mythical idea of an "Intelligent EMS" for the buy side now for some time, and this would appear to be part of the next step. Portware is an example of a provider focused on the subject, while State Street Global Advisors explained to Anthony Malakian what they've done with it at SSgA last year.

Of course, alpha profiling is probably useful only at mid- and upper-tier shops using an EMS to begin with, where PMs and traders are plentiful and dispersed enough to truly have insufficient clue as to what one another are thinking when market events hit.

But the technology is interesting nevertheless, because it helps to solve one of those sticky problems that should never really be there to begin with. Furthermore, larger managers often find upon post-trade analysis that the problem causes significant execution slippage or reveals block size and, as a result, costs serious coin too.

Like risk analytics for Pillar III, it's part of an unsexy but newly-necessary cadre of intelligence tools to deal with the everyday challenges of being a large buy side in 2015.