The world of derivatives solutions, traditionally dominated by big institutions using very advanced, proprietary systems and a few large suppliers of turnkey software packages, is becoming more crowded. The newest face is an old one: FinancialCAD Corp., a small private company based in Surrey, British Columbia. Formerly called Glassco Park Inc., it is moving into the "solutions" market next month, after building a respectable niche providing Windows-based financial engineering technology for the same marketplace, with a new product called FinancialCAD Server that will compete for turnkey customers.
The company's current niche is pretty comfortable. As Glassco Park, it served more than 1,800 financial services companies directly involved in the derivatives business. These customers-including Bank of America, Soros Fund Management, and Deutsche Bank-have used some or all of the company's "library" of 300 algorithms as the mathematical engine driving their derivatives operations. Credit Suisse is using FinancialCAD as part of its new international risk management system (see chart).
As a result, a respectable fraction of the derivatives world today is built on mathematical models created and marketed by the partnership of David Glassco and Robert Park, who met in 1988 while working together at the Vancouver branch of Wood Gundy, a Canadian broker-dealer owned by Canadian Imperial Bank of Commerce, and who started the business in 1990 on a $35,000 line of credit. Glassco is the chairman, and writes the programs; Park is president, and runs operations.
Since it started, FinancialCAD has financed itself largely by selling private stock to investors, says Park. Its most recent partner: Nichimen Corp., which will be its Japanese distributor. Glassco and Park still own about 45 percent of the company, but there are over 50 private shareholders.
By Park's account, 1997 has been a great year for FinancialCAD. "Our client sites have doubled since 1996," he says. "But we haven't been in a serious marketing posture until 1997; before that, we were concentrating on R&D." The company is still small, although it just moved into new 8,000 square foot digs in a suburban office park-more than twice the size of its old space. And its customer service department grew four-fold, to eight persons. But size is of no concern for Park. "We have customers in 45 countries," he says. "We don't have a lot of walk-in traffic."
That being the case, the obvious question is, can this seven-year-old company, with revenues "far below" $10 million, according to Park, compete effectively against entrenched public companies like Infinity Financial Technology? For the six-month period ending June 1997, Infinity saw revenues grow almost 63 percent over the same period last year-from $17.9 million to $29 million.
The answer: Could be. FinancialCAD has strengths that will come in handy-and powerful allies, too.
One of its strongest suits: Reputation. "It has a very good reputation for providing add-ins for spreadsheets and individual routines for analytics that you can build into your own applications, and they did those analytical add-ins well," says Octavio Marenzi, a partner of Needham, MA- based Meridian Research, Inc.
Federal Farm Credit Funding Corp., a FinancialCAD customer, agrees. "We use it to monitor the market and to help provide indications to our banks as to where the levels are for various trades," says Bill Whitehead, vice president and director of research for the Federal Farm Credit Funding Corp., a government-sponsored entity based in Jersey City, NJ, that issues about $180 billion a year in bonds and money market instruments based on agricultural loans. Whitehead's group purchased FinancialCAD technology in January.
An example of how Whitehead uses FinancialCAD: "If we saw a three-one trade (a three-year loan with a call option at one year) and a five-one trade, but we hadn't seen a four-one trade, by deriving the implied volatility, we can interpolate the likely number the Street would be using for a four-one, and then estimate the coupon we would put on it; then we can compare that with swap levels and arrive at where we would be likely to raise funding for a deal of that sort."
Whitehead says he also uses FinancialCAD for deciding whether to exercise call options, as well as calculating forward rate curves that banks can use for pricing securities.
Another FinancialCAD strength: its preferred vendor relationship with Microsoft Corp. "The FinancialCAD server is in beta testing with Microsoft's treasury (arm), and, of course, Microsoft is keen on promoting this because it all runs on Windows NT and it's a completely Microsoft solution," Marenzi says.
FinancialCAD's algorithms have already been incorporated into the newest version of ICMS International's treasury management system. ICMS, based in San Bruno, CA, says it was the first vendor to supply Windows-based products for treasury management and claims the largest Windows-based client list in the financial services software industry.
Microsoft NT's influence in the financial world is growing-a phenomenon that could further cement FinancialCAD's presence in the market. FinancialCAD products work with Microsoft Excel, Visual Basic, and Visual C++ on Windows, as well as on Windows, Windows 95 and Windows NT operating systems. This means that the growing number of institutions migrating to Windows NT is creating demand for NT applications, and, in the process, spreading the influence of FinancialCAD. "We had to move a lot of analytical work over to the PC environment for some more advanced option pricing models we were using these days. (Those models) seem to be designed for the Excel interface, because it's something finance professionals are familiar with," says Whitehead.
So if Microsoft continues picking up market share and its products come to dominate the financial services world, the number of persons using FinancialCAD tools will arguably grow. The upshot: The mathematical models produced and marketed by David Glassco and Robery Park will have even more influence on the world of derivatives, helping guide a $22 trillion universe.