Societe Generale's Swaps Solution
In an effort to increase back-office control and efficiency in its swaps area, the New York office of Societe Generale has installed software designed to help track these complex deals.
According to Antonino Piscitello, first vice president in charge of the U.S. operations division at Societe Generale, this move represents both a technological upgrade and a perceptual shift in how his bank views the processing of swaps.
Societe Generale is France's largest publicly owned bank, with $175 billion in assets. It is one of the leading players in global swaps, a rapidly expanding marketplace dominated by international money-center banks, investment banks, governments, and organizations such as the International Bank for Reconstruction and Development.
Although there is a wide variety of permutations, a typical swap transaction involves at least one party trading interest rate payments for a credit with another party. Swaps allow banks to maintain a balanced exposure to fluctuations in interest rates, currencies, and commodity prices without altering their funding arrangements.
Back Office Getting Bigger
"Because of the inherent complexity of the swaps market, it's critical that the back office does more than process transactions," Mr. Piscitello said. "Now, our primary back-office focus is on understanding what the products are, what they can do, and how we can support our bank's increased activity in that area."
The available options typically include interest rate swaps, currency swaps, and other more exotic instruments such as swaptions, an option on a swap. According to the International Swap Dealers Association's 1990 survey, the "notional" value of international swap activity reached $2.889 trillion, a 46% increase over the 1989 levels. Notional value refers to the amount of the principal on which interest is calculated.
Societe Generale is using software from Quotient Inc., the New York branch office of London-based Act Financial Systems, on the bank's Digital Equipment Corp. VAX computers. The software, called Cmark, helps Societe Generale reduce the manual effort needed to track swap positions and produces daily profit-and-loss statements.
Quotient is one of a handful of companies at the forefront of tightening the controls and improve the accounting procedures in this evolving market.
In the early 1980s, when swaps made their debut, banks focused on the "front end" of the operation, providing traders with powerful analytic tools to structure deals.
Today, the size of the market and the complexity of the transactions pose challenges to institutions concerned with managing their risk as well as responding to regulators. Therefore, the focus on the back office will increase, bankers say.
"In the beginning, most banks could manage their swap books manually. But as their books grew and payments came due, the back-office function took on nightmarish proportions," said Richard Caplis, a partner in the financial services consulting division of Coopers & Lybrand, New York. "With such large notional values, the need for control has become huge."
Internal confusion of this sort has resulted in a number of serious problems, including an $80 million loss resulting from a swaps miscalculation by Banker's Trust in 1988.
Trade Group Takes Initiative
"They had one very aggressive trader taking huge positions. No one but that trader knew what formulations were being used or what exactly created the numbers he generated," said Peter Davies, president of Standard Rate Services, New York. "Errors like this clearly underscored the need not just for improved accounting methods, but for industry standards."
The International Swaps Dealers Association has taken the initiative in this area. Its newly formed operations committee has alerted industry vendors that the dealers' group will focus on accounting standards in the coming months.
"Back in the early 1980s, people made so much money, back-office control wasn't a priority," Mr. Davies said. "In the 1990s, it will be important to remember that money is tough to make, easy to lose. If you don't control it, you're out of the game."
PHOTO : Swaps Skyrocket In trillions of dollars
Deidre Sullivan is a freelance writer based in New York City.