IN THE WORLD OF financial risk management, timing can be everything. So, too, can computing power.
In order to help clients manage a dizzying array of cash flow needs, investment bankers are always on the lookout for tools to provide support and analysis for the latest hedging techniques.
"You have to have sophisticated systems," explained Burt Hilton, vice president, marketing, Sanwa Financial Products Co., the New York-based derivatives trading unit of Sanwa Bank, Osaka, Japan. Created in 199 1, the unit is a relative newcomer to the business.
Sanwa Financial is creating a technology structure that Mr. Hilton and his colleagues say will meet the mercurial requirements of the marketplace.
Central to this new structure is a concept known as object-oriented programming. This approach to programming allows users to incorporate subtle changes into the underlying programming code that is the basis for many sophisticated financial instruments, without having to create each new product from scratch.
"With object-oriented programming you're changing a few small attributes [of a product] and creating a new beast, and the new beast sits in a world where everybody knows how to interact with it," said Roger Lang, chief executive officer of Infinity International Financial Technology Inc., Mountain View, Calif.
Sanwa is using the company's Montage products, which incorporate applications for trading and risk management and tool kits for custom software development.
Organizations such as Sanwa must be able to clone new derivatives products from existing product offerings quickly, and imbue those products with their own subtle yet unique features.
"What these organizations are looking for are ways of acquiring development systems that are capable of responding to changes in products in a very timely fashion," said Juan Pujadas, a principal at Price Waterhouse, New York. "The old programming languages can't handle that."
Jim Rogers, Sanwa Financial's vice president for systems development, estimates his programmers can develop a new twist on an interest rate cap, complete with the ability to price and track the product, in three to four weeks using Montage.
With traditional programming tools, he estimated, the task would take several months.
Many of the derivative products clients request may require only minor twists on traditional products, but they can't be accommodated quickly and easily with traditional software tools, Mr. Rogers said.
Mr. Rogers speaks from experience. When Sanwa Financial first set up shop, it used a commercial programming package for developing homegrown software applications to support new products. But it proved unwieldy, requiring significant development time.
With Montage, which he expects to be fully in place this month, Mr. Rogers anticipates substantial reductions in development times.
"They're on the cutting edge of innovation," Mr. Lang said of Sanwa. "The high margins are found on the cutting edge of this new-fangled process."
In a market brimming with competition, Sanwa Financial has had to distinguish itself as a way of attracting customers.
"Technology lets us go after the newer, more exotic structures and handle them, competently," explained Mr. Rogers.
In the derivatives market, Sanwa focuses on over-the-counter products.
Its objective is to help clients (typically Fortune 500 companies) hedge against financial exposures and changes in market conditions using currency, interest rate, commodity, and equity products.
Some of the more common techniques that are employed include swaps, swap options, collars, floors, and caps.
The mechanics of hedging a customer's investments and cash flows with financial derivatives are not simple.
The process is situationally oriented, not product-oriented, said Mr. Hilton.
A banker working out a hedging scheme for a corporate or institutional customer must develop several ideas, consult with the customer to determine whether those ideas meet specific cash flow needs and risk thresholds, and then fine-tune the strategies as needed.
"You go through several iterations before you come through with a final product," Mr. Hilton said.
"We have to really provide our customers with the ability to sell it [the product] internally, and that requires all kinds of analysis to back it up."
Yet, all of the product fine-tuning and internal salesmanship must be accomplished in a relatively short period of time.
"It doesn't matter to the client that it's a complex process," Mr. Hilton said. If a competitor can perform the same function in a shorter period of time, chances are good the client will move its business to that competitor, he added.
"These are not relationship-driven [sales] as much as they are idea- and price-driven," he said.
This represents a significant change in the business mix, according to Mr. Hilton.
In the past, he said, if a bank made a loan to a customer, the customer typically would ask the bank to help it hedge the loan, perhaps purchasing a cap to protect against the likelihood that a floating interest rate would rise to an excessive rate.
Today, he said, the market abounds with organizations eager to help corporations and other potential clients devise new hedging schemes.
Neither Mr. Rogers nor Mr. Hilton will discuss specifics of how much it cost Sanwa to convert to Montage, and they concede that determining payback is difficult since earnings hinge on the flow of deals.
Both are convinced, however, that the investment was a wise one.
"We really looked at this as a strategic decision," said Mr. Hilton. "It gets us in certain businesses we might otherwise not have been equipped to get into."
As far as Sanwa executives are concerned, the focus of the investment and the measure of its payback is competitive ability.
"There's a high degree of competition out there," said Mr. Hilton of the derivatives market.
"We have to adapt to that. As the competition comes up with new ideas, we do, too," he added.