Credit Derivatives: Trading, Investing and Risk Management, Second Edition

28

System Implementation

Robert Baker, Partner in Reoch Credit Partners

 

 

 

This chapter discusses the implementation of a credit derivatives system from an IT perspective. The focus is on data elements, data capture and flows, functionality and interactions, practical problems occurring in valuation runs, and reporting. The chapter concludes with an overview of the special features of a credit derivatives system and the relative attractions of in-house versus purchased systems.

28.1 ANATOMY OF A CDO

In order to understand the provision of an IT system to manage CDOs it is instructive to consider the composition of a CDO as outlined in Figure 28.1. We shall then look at how the composite elements change over time and how their data is sourced.

28.1.1 Reference Pool Data

The reference pool of assets may change over time. There are two principal causes of change:

a. Default of a name in the reference pool will automatically cause it to be removed from the CDO.

b. The CDO manager may substitute a name in the pool. This substitution will involve some or all of that name’s notional being removed and a new name replacing it. In the following it is worth bearing in mind two examples - the iTraxx series 9 CDO (say) and a managed bespoke CDO. The first structure is static, it is a data source and may also exist as an actual transaction; the latter is a transaction.

Each reference entity in the pool contains static, semi-static and market data. Note that reference entities may disappear ...