The capital markets have always been at the forefront of adopting innovative technologies—among these is cloud computing. Cloud usage is surging with capital markets participants because they rely on fast information processing, the analysis of huge data sets, complex risk management, and effective execution of real-time trades, which are all strong suits of cloud.
Cloud technology is also ideal for complex pricing and risk analytics functions, including valuation adjustments such as XVA. Leveraging cloud computing for computationally intensive XVA calculations enables firms to benefit from increased scalability, cost-effectiveness, flexibility, data accessibility, regulatory compliance, and other tangible benefits.
Complexity of XVAs
As the capital markets see an increasing need for tougher risk safeguards, a premium is being placed on XVAs. The changing landscape over the last decade or so, significantly driven by new regulations, means XVAs have grown in size and complexity.
Additionally, widening credit spreads and funding spreads are bringing XVAs back into the fold, as the costs associated with XVAs are now typically being incorporated into the prices of trades. However, the calculation of XVAs is highly complex, combining the particularities of derivative pricing with the computational challenges of managing related risk.
Simplifying XVA Calculations
It’s fair to say that calculating XVAs is one of the largest computational challenges banks face on a daily basis. The issue, though, is more than just calculating numbers. You need to be able to have good decision support capabilities within your system—and you need to be aware of the real costs of executing a trade, ideally before you even initiate the trade.
Pre-trade XVAs and XVA Greeks demand even greater computing resources because of the near real-time requirements of trading desks. As banks look to optimize XVA usage, they are making strategic choices in regard to their XVA capabilities in an attempt to solve the computational challenge of simulating a full universe of risk factors. A modern cloud architecture supports the heavy calculation demands of XVA pricing—a significant benefit when dealing with complex portfolios. It’s worth noting that Numerix’s XVA solution, Oneview for XVA, has been specifically built for handling complex calculations, is scalable and cloud-native—enabling unparalleled accuracy, real-time calculations and dynamic custom reporting and analysis capabilities.
Flexibility & Scalability of the Cloud
The inherent agility and configurability of cloud services enable a financial services firm to select or design a cloud service that meets its specific business, risk management, compute power, elasticity, resilience, and operational needs. This flexibility is ideal for managing XVA and a myriad of other pricing and risk functions that firms deal with daily.
As cloud increasingly enables business agility, outsourced cloud compute services are becoming more prevalent across the financial services industry. In this regard, one cloud model that a growing number of firms are embracing is Software as a Service (SaaS), a software delivery model whereby software is hosted on a cloud infrastructure and made available to users via web-based APIs. Cost-effective, accessible, secure, and scalable to address changing demands, SaaS software solutions enable financial organizations to streamline operations, improve collaboration, and place greater focus on driving business growth.
Cloud Computing White Paper
For deeper insights and an exploration of additional use cases for cloud computing in the capital markets, download our insightful white paper, If More Convincing Is Needed, Here are 4 Essential Reasons to Make More Use of the Cloud
