The annual meeting of the International Swaps and Derivatives Association here had the look of a software convention.
Executives and salespeople from the likes of C-ATS Software, Diagram, Infinity Financial Technology, Integral Development Corp., INSSINC, and Sungard Capital Markets swarmed the meeting rooms in the Hyatt Regency last week - sometimes appearing to outnumber the derivatives traders who make up ISDA's core membership.
The salespeople were pushing risk management in the form of sophisticated computer models that tell banks how much they could lose on a bad day.
Most of their companies got started with programs for derivatives trading. Since derivatives are often used to manage risks posed by market movements, the trading technology evolved into ways to measure market risks. Now the software companies say they are making progress on quantifying credit exposure and other major risks.
All this is transforming, and improving, risk management at banks. So far it has affected mostly the money-centers, but now regional banks are starting to invest in the software - known generally as "value-at-risk" models. If predictions at last week's meeting come true, smaller banks won't be far behind.
This could have a big impact on bank regulation.
The Basel Committee on Banking Supervision already has decided to set capital standards for market risk at the biggest trading banks by using the banks' own risk-measurement models. If the models can be expanded to include all major risks faced by a bank, they could - in theory, at least - be used to calculate individualized capital standards that truly reflect risk.
"Now everybody is beginning to think of risk as a single number," said Olivier Croissant, director of financial engineering at Renaissance Software, Los Altos, Calif. "In the next year, systems will demonstrate that it is possible to get a single number."
Regulators aren't convinced.
"It's great that they can reduce your risk to one number, but what does that number really mean?" asked Douglas E. Harris, senior deputy comptroller for capital markets.