Commerzbank Manages Collateral With IFS' Marginman

FRANKFURT--Monitoring collateral values in real time and establishing triggers for adverse movements in the valuations are counterparty risk strategies that have been adopted by Commerzbank on a global basis. The technology behind the move is the newly-implemented Web-based Marginman foreign exchange margin trading and position-keeping system from International Financial Systems (IFS), which replaced an internally developed collateralized trading system.

"From our point of view, we saw it as the most sophisticated system," says Hans-Joachim Schwabe, senior vice president and project manager for Commerzbank. Schwabe, who is also responsible for the FX sales desk in Dusseldorf, Traders in the London and Frankfurt branches of Commerzbank will be among the first to use the Marginman, version 2.0, platform. One of the main benefits of the Marginman system is its ability to show FX traders what their counterparties' exposure is. "The benefit is to get the right calculation of risk," he says. "You see immediately what risks you have. We use it as a way to monitor the counterparty risk of the customer." Schwabe declines to name the other vendors that were considered. The Marginman project began three months ago, he says.

Marginman consists of Web-enabled, collateral-based trading modules for global foreign exchange, bullion and currency option trading, according to IFS. During the trading process, the Marginman software is capable of determining the value of collateral, and helping traders and others monitor the risk inherent in a client's open positions. The system can issue alerts when a firm's collateral/risk ratio drops below pre-defined limits. In those instances, Marginman automatically issues real-time trading alerts for margin calls, close-outs, client orders and missing prices. Portfolios can be updated and re-valued in real-time.

The core module of Marginman, version 2, has been designed for managing the real-time mark-to-market of cash in any currency, non-cash and term deposit collateral; deferred settlement; FX trade entry; position updating and revaluation; and portfolio monitoring. Other modules can be integrated with the core software and used with FX Options trading and Value at Risk (VAR) margining. User firms can set margin requirements by currency pair or VAR; Schwabe declines to identify the risk management system that Commerzbank applies.

"Our goal is to go live in the autumn with London and Frankfurt," Schwabe says. After the initial rollout, the bank will give Marginman to its traders in New York, Singapore, Tokyo, Paris, Hamburg and Dusseldorf, he says. In all, 20 FX traders will be using the Marginman system, and they will have links to a global database maintained in Frankfurt, he says. There will be no interfaces to other bank-wide platforms or applications, he says.

IFS designed Marginman, version 2, for the Microsoft Windows NT platform and it supports Microsoft's Open Database Connectivity (ODBC), a common API that links Windows-based applications to relational databases. Marginman is able to operate in a standalone environment, via a LAN and a global network (WAN). To facilitate global wide area links, Marginman uses Corba-based messaging.

Commerzbank is the third major German bank to adopt Marginman from Dublin-based IFS. IFS has landed contracts at Deutsche Bank and Dresdner Bank (Trading Technology Week, April 6, 1998). In addition, IFS has identified as Marginman clients Credit Lyonnais, ABN Amro, Royal Bank of Canada and Donaldson, Lufkin & Jenrette. Also this past June, Intel and Deutsche Bank acquired a joint stake of 14 per cent in IFS (TTW, June 7).

Credit Lyonnais is in the middle of a rollout of the Marginman version 2.0 risk management system for collateralized trading from Dublin-based International Financial Systems to its Asia/Pacific offices.

The Marginman installation is part of the bank's move to increase margin trading in Asia and to replace its incumbent, now defunct FX trading system from Zainet, installed in the bank's Taipei office.