Cloud Solutions: A Must-Explore Alternative in Derivative Operations

By Filipe Rodriguez, CTO, CloudMargin

Filipe Rodriguez, CTO, CloudMargin

In the field of derivative operations, CIOs and CTOs are rapidly discovering that cloud solutions are a must-explore alternative. The changing regulatory landscape has delivered extraordinary new challenges that chief technologists must help their firms manage, often without the safety nets of a higher budget or time. Every-day DerivOps processes, that previously were handled by simple Excel spreadsheets or complex on-premise proprietary or outsourced technology solutions, now face an exponential increase in volume, along with much higher stakes for errors. Well-designed cloud-based technologies may check all the boxes for solving these challenges:

"Today’s financial services world, with ever-changing regulatory requirements, demands a dynamic, agile business environment "

• Compliant with new regulations; easily adaptable as these change
• Affordable; usually a fraction of the price of on-premise solutions
• Easy to maintain and upgrade
• Rapid to deploy
• Readily scalable (up or down)

• Offers a large set of automation tools
• Highly secure

In our world of collateral management, operational requirements have just increased dramatically. Buy-side institutions and other market participants on multiple continents now must comply with daily Variation Margin rules that went into effect, and we estimate that this will increase firms’ collateral activity by 500 percent. These types of regulatory changes have a dramatic impact on the daily processes of market participants, who need to ensure that they demonstrate steps toward compliance, optimize their accuracy and find solutions that are both resource-and cost-efficient. We would argue that a robust cloud solution is the only viable option for many of these organizations.

On-premiseSolutions: CaveatEmptor

On-premise solutions may sound very appealing. You maintain control on site so you have a customized solution within your own firewall. But let the buyer beware. These solutions can lock you into long commitments and inefficient operational processes due to the high investment across people, time and money. Today’s financial services world, with ever-changing regulatory requirements, demands a dynamic, agile business environment.

Anyone who has managed the installation of an on-premise solution knows that this is usually a long-winded process. The vendor will work closely with you to tailor a solution to just what you need, but it often involves extensive staff time, and it typically takes months to years before it is ready for use. The cost escalates as the complexity of your needs increases, and upfront costs are particularly high. You may get many more bells and whistles than you need. The operations people who will use the program may need substantial training. You must devote significant ongoing IT resources, and any time there is a glitch, your people need to work with the vendor to solve the problem. In the start-up phase, you will need to estimate a budget based on number of users and capacity, and a tailored solution is developed to fit those estimates. If, however, after a year, you are only using one-third of the capacity, you now are locked into an over-committed budget.

Typically, with an on-premise solution, you have to upgrade the hardware every three to four years. If you’re not satisfied with the vendor service, it may take at least months to get out of the contract, and you’ve made such a significant investment in time and resources that you may be reluctant to cut the cord.

New regulations bring new obligations, and it’s difficult to be nimble with a hardware-heavy on-premise solution—even one you may have designed internally. Building your own on-premise solution can be at least as daunting and extraordinarily expensive to deploy and maintain.

Enter the Agile Cloud Solution

Compare these challenges with a cloud solution. What takes months or years with hardware installation could take hours, days or weeks in the cloud. If you need to change your processes due to new regulations, you’re not alone. There is most certainly a vendor that has figured out a way to do this in the cloud. In the highly regulated financial industry, cloud solutions must stay up to date onthe technology and regulatory landscape. Cloud-based technology can quickly deploy new functionality that helps improve mundane tasks associated with new regulations. This means no waiting for a professional services team from the on-premise vendor, or for your internal team to research and devise a way to automate the tasks. You’re not sure how many users you will have or what capacity you need? Mitigate the unknown, and pay only for what you actually use. It’s very easy to scale up or down. Not satisfied with the service? If a problem doesn’t get solved to your satisfaction, switch off the service whenever you have another solution available. Cloud solutions enable you to stay agile.

Cloud-based solutions are Software-as-a-Service (SaaS) that harness Infrastructure-as-a-Service(IaaS) to quickly deploy and maintain complex applications.

At CloudMargin, we provide our clients with a SaaS solution, and we contract with an IaaS provider of on-demand cloud computing that underpins our offering. Amazon Web Services (AWS), Google Cloud Platform and Microsoft Azure are three of the major IaaS providers of cloud computing. As we contract these services and then design our software to meet our clients’ collateral and margin management needs, users benefit from the additional security and sophistication built into the cloud offering. SaaS and IaaS subscribers can template their software using tools like Docker and Terraform to easily provision their complex service architecture to multiple geographical locations with the click of a button.

When we first started our business, we hosted our own solution in a data center. We have saved five fold since contracting with AWS and now can extend that savings and leverage its benefits for our clients, focusing our efforts on the expertise in collateral and margin management.

Some banks have opted to build their own cloud solutions and have spent millions of dollars on the endeavor. They don’t have the scale that an IaaS can provide, and they will have extensive costs to maintain the system and to replace the hardware. They will need the in-house expertise to maintain it and run their own data center. This approach is really only available to the largest banks as other market participants likely can’t afford the time or cost involved.

Clients of cloud-based SaaS firms often save millions or tens of millions of dollars over on-premise systems and can be up and running in no time. The software is constantly updated as a matter of course, and product enhancements are immediately deployed to all users, unlike on-premise solutions, which require the user to passively wait for the next upgrade. Strategic cloud solution providers will solicit client feedback and introduce enhancements from which all can benefit.

We are aware of a bank that requested a small fix to the system of an on-premise solution. They were told it would take up to six months and cost hundreds of thousands of dollars, and there would be no guarantee that this change would fix the problem. A cloud solution could have addressed this issue almost immediately, with no extra charge to the client.

CIOs have more on our plates than ever before. Deployment of cloud-based solutions can free us up to devote our technology resources to those products and services that truly distinguish our companies from the competition and offer our employees, constituents and clients the value-added technology they need.