After two years of testing, Treasury Services Corp. and Kamakura Corp., a Japanese investment banking and risk management firm, have unveiled new software to manage derivatives risk.
The companies' Option Adjusted Valuation uses statistical techniques developed by Chigasaki-based Kamakura to help analysts value derivatives, fixed-rate and adjustable-rate securities, and securities options. The software then helps banks apply those valuations to balance sheets.
Company officials said the software also lets asset-liability managers value the costs of loan prepayments, and can take into account customer behavior, such as sudden withdrawals, that affects risk independently of interest rate changes.
Officials from the two companies said the product - when integrated with Treasury Services' Evaluation and Reporting System, or TSER - brings risk managers closer to using a single system to manage financial risk across an entire enterprise.
Toronto-Dominion Bank tested the software. David Tanner, its vice president of asset-liability management, said the bank plans to use it on the nontrading side of its risk management, but will continue to use its proprietary system on the trading side.
The bank's nontrading operations handle structural mortgages, loans, and retail and term deposits.
The software's strong capacity for modeling customers' behavior helps determine whether they will exercise their option to do more or less business with the bank, Mr. Tanner said.
Toronto-Dominion is "still kicking the tires" but has high hopes for the software, he said.
Other banks that tested it were Banc One Corp., Citicorp's Australian subsidiary, Royal Bank of Canada, Sanwa Bank of California, Star Banc Corp., and Westpac Banking Corp.
The product is expected to appeal mainly to the biggest banking companies.
"Those organizations have invested a lot of money in risk management," said Denise Heyman-Loa, a partner with Ernst & Young, New York.
However, she noted, Option Adjusted Valuation does not deal with operational, settlement, or credit risk - even when combined with other software from Treasury Services - so it is not a complete risk management solution.
John Dorman, president of Santa Monica, Calif.-based Treasury Services, agreed. "I don't think we are the only solution for enterprise risk management," he said, "nor do I think we are a complete solution to enterprise risk management."
The U.S. company began working with Kamakura two years ago.
Steven L. Reich, a principal at Treasury Services, said combining its own software with Kamakura's risk management and analytical techniques for trading "takes the latest and greatest techniques of the derivatives side of the world and delivers them for management of the rest of the bank."