INSSINC's Orchestra is offering an easy-to-install, Windows-based interest rate front and middle office system at a bargain price. The question: can a mass-marketed product really fit your needs?

Today the thought of a full-blown systems implementation is enough to make risk managers on a limited budget break out in a cold sweat. Price tags approaching the $500,000 mark, endless development meetings, new hardware and consulting costs all discourage mid-sized institutions and companies from moving beyond the humble spreadsheet-as-risk-measurement-tool, even as Office of the Controller of the Currency (OCC) and Securities and Exchange Commission (SEC) risk management requirements loom on the horizon. All that, however, may be about to change.

New Jersey­based INSSINC, a 13-year veteran of the financial systems industry best known for its FUTRAK back office system, is preparing to release Orchestra Version 5.0, an interest rate front and middle office system that literally comes in a box. According to INSSINC president and founder Elie Zabal, "Our goal is to offer a system that you can have up and running in 10 minutes." The system comes on a single CD-ROM, and it can be rapidly installed in one step on any PC that runs on either Windows NT or Windows 95.

INSSINC sells itself as a Microsoft solution provider. Orchestra is written in Visual Basic with Microsoft Access as its database and features include easy interfaces with Word, Excel and the Crystal report writer. Likewise, Orchestra's user-interface has the look and feel of Windows that so many users prefer. While the Microsoft desktop technology, which is aimed more towards small workgroups than large, enterprise-wide initiatives, may begin to slow down when deal volume begins to exceed a few thousand transactions, Zabal explains that Orchestra is not intended to appeal to the large dealers of the world. He says, "We want to reach mid-sized and small banks and dealers, as well as corporates. We are a cost-effective alternative for anyone who wants to replace a collection of spreadsheets with a robust, turnkey risk management system."

Firstar, a $20 billion commercial bank holding company, fits the profile of a typical Orchestra customer. According to Jim Ropella, Firstar's vice president of treasury, he first began looking into derivatives systems when he discovered that according to the latest standards, Firstar met the OCC's qualifications as a second-tier dealer. Says Ropella: "Our derivatives business is really very small. We offered swaps and other plain vanilla interest rate deals to our customers, which are primarily correspondent banks and corporations." In addition, Firstar's treasury uses derivatives to hedge its own interest rate exposures.

A little more than a year ago, Firstar began searching for front, middle and back office software. Ropella says, "We wanted something that could help us accurately value the derivatives on our books and help us manage back office administration." He explains that in addition to INSSINC's Orchestra and FUTRAK products, Firstar looked at an interest rate back office specialist and two large dealer-type systems. Although the large dealer systems appeared to have greater functionality than Orchestra and FUTRAK, particularly in terms of exotic instruments, purchasing a full-blown dealer system would have been like using a machine gun to kill a fly.

Likewise, Ropella was impressed by Orchestra's user-friendliness and FUTRAK's long track record. He says, "We wanted both back and front office capabilities and we thought the Orchestra­FUTRAK combination best fit our needs and our budget."

Today Firstar uses Orchestra primarily to price trades internally-and thereby check the prices that they receive from dealers without having to call around for prices. Says Ropella, "We are no longer at the mercy of derivatives salesmen." In particular, he explains that the system's zero-curve generator is helpful in terms of generating accurate prices. Also, Firstar is beginning to experiment with Orchestra's value-at-risk functionality, because the firm's auditors are eager to include VAR in the firm's risk management reporting.

Another user who opted to use Orchestra in concert with FUTRAK is Nissan Finance of America, a "captive" finance company that secures dollar financing for Nissan companies in the United States. NFA treasurer Benjamin Harwood explains that the company initially decided to purchase both the front and back office system in order to improve NFA's reporting capabilities. "We are not using Orchestra for trading; we are using it to provide risk position and transaction detail reporting," he says. NFA also intends to use Orchestra to track VAR for each swap counterparty.

NFA has approximately 300 swaps on its books, including dollar­yen currency swaps. Harwood explains that Orchestra's instrument coverage has been more than up to the task. And, in the future, he hopes to make greater use of Orchestra's flexible Crystal report writer. "Orchestra at its current price is a good value, and it's entirely appropriate for our needs," he says.

Of course, Orchestra is also used at some larger banks and corporations, primarily because of its breadth of functionality, which includes liquidity risk and model risk reporting, in addition to parametric-style VAR and sophisticated scenario analysis. These larger clients include Barclays Bank in London, which at any given time maintains up to 5,000 open positions in the Orchestra system, Germany's L-Bank and IBM's corporate treasury. And although Orchestra is currently an interest rate front and middle office system, it is capable of accepting downloads of FX transactions, including options, for reporting purposes. In the near future, explains Zabal, FACTS, the firms' older FX front office program, will be merged with Orchestra so that Orchestra will support FX deal entry as well as risk management.

Thus it seems that Orchestra may indeed provide a low-cost alternative for small and mid-sized corporates and financial institutions looking for a user-friendly introduction to risk management. And, when combined with FUTRAK, it promises a high degree of front-to-back office integration.

Jos Stoop
President, Intuitive Products International

Orchestra is appropriate for firms that do not have trading as a main activity. Its Microsoft Access data architecture means that the system cannot handle larger (that is, thousands of deals or more) volume trading or multiple users operating in multiple sites. But for low-volume users, which compose Orchestra's target market, the Access architecture is easily accessible and will not require a costly investment in new hardware or system integration or implementation. Indeed, Orchestra can run comfortably on the latest standard, desktop PCs.

In terms of functionality, Orchestra comes close to much larger-and more expensive-dealer systems. In particular, the system's deal-entry screens appear to be very modern and flexible. Likewise, Orchestra's risk management capabilities, which include scenario analysis and parametric, RiskMetrics-compatible VAR, are ideally suited to corporates and smaller financial institutions.

One issue that users will have to consider carefully with regard to Orchestra is scalability. Because of the volume limits inherent to Microsoft Access, it is important to evaluate not only where your trading or hedging operations are today, but also where you think they are going to be in two or three years. The multiuser or data-sharing capabilities they may require of the system should also be tested thoroughly, although for small-scale users planning to use Orchestra in a single office, networking may not be an immediate issue. It is, however, important to anticipate situations where, for example, a risk manager overseas may wish to start reviewing your risk reports and related data.

For users that want to integrate their front and middle office functions with their back office, it will be critical to investigate Orchestra's ability to interface with their back office system, particularly for those who do not use INSSINC's highly developed FUTRAK.

Overall, however, Orchestra looks like a high-quality system which could be a great help to firms that are only beginning to implement quantitative risk management techniques such as VAR. Furthermore, it is likely that the system will grow significantly in functionality and capabilities over time. And finally, Orchestra is selling for an extremely reasonable price based on what it offers; it would be near impossible to develop this sort of functionality on spreadsheets for less money. In short, the product appears to be an excellent alternative for firms that want to take the next step beyond the spreadsheet.

Wilton, Connecticut­based Intuitive Products International offers middle and back office consulting services to the derivatives and FX industries. IPI has offices in New York and London and clients in both Europe and North America.

Jeffrey Wallace
Managing Partner, Greenwich Treasury Advisors

I am currently working with a lot of staff at corporate treasuries that are attempting to implement VAR and other quantitative risk measures. Because corporate treasuries often do not have substantial systems budgets, most risk management systems are out of their reach. Risk management is conducted primarily through spreadsheets. Orchestra's price tag, however, is corporate-friendly and, for firms with relatively plain vanilla liability portfolios-which describes most corporates-it could provide a solid risk management "starter kit."

One issue, however, which some corporates might have with Orchestra is the fact that it uses a variance-covariance VAR methodology. Many companies have options embedded in their debt. The RiskMetrics approach which Orchestra uses is easily accessible and widely available. But the RiskMetrics approach includes the assumption that all the instruments in your portfolio have normally distributed payout profiles; this is not true with options. Therefore, this sort of VAR analysis may only be applicable to companies that have a very simple liability portfolio; these firms are frequently not particularly active risk managers.

In terms of scenario analysis, however, Orchestra offers a great deal of flexibility and sophistication. Of particular value is the system's ability to run scenarios on non-parallel shifts in the yield curve. Also, Orchestra's Crystal report writer could help companies create interest rate expense and income projections through the zero-coupon curve, provided that they have some sort of estimate of their future portfolio's size. Likewise, these projections could also be subjected to the scenario analysis described above.

With respect to instrument coverage, Orchestra offers a strong selection of pricing models, adequate for most corporates' needs. For companies intent on blending their interest rate and FX risk management, it will be necessary to download FX transactions and exposures into the system; so far, the deal input screens can only handle interest rate deals, although this could change if and when INSSINC combines Orchestra and the FACTS FX module into an integrated front office system.

When combined with FUTRAK, Orchestra can also function as part of an integrated front-through-back office system. FUTRAK is a mature, fully functional back office system which runs in DOS and has a considerable following among mid-sized banks and corporates. Of course, the cost of Orchestra and FUTRAK together is considerably more than Orchestra alone. Also, for firms that already have a back office system in place, whether or not Orchestra can interface with that system will become a critical consideration.

Overall, Orchestra is an inexpensive risk management system that can help corporates move to the next level of risk management sophistication. And given INSSINC's longevity in the financial systems marketplace, there is every indication that the system will continue to improve-there are plans to integrate Orchestra with FACTS-as it gains a wider presence in the corporate marketplace.

Greenwich, Connecticut­based Greenwich Treasury Advisors provides treasury and risk management consulting services to a wide selection of corporate clients from Fortune 50 multinational companies to privately held middle-market companies.

Patrick McTurk and Ralph Griesenbeck
The Fusion Systems Group

In our opinion, Orchestra is appropriate for its target market, which includes corporates, small dealers and second-tier banks. Because Orchestra is based on desktop technology, it may not be appropriate for multisite, highly distributed operations. Still, depending on the number of users in the shop, Orchestra does appear to be quite scalable. While the system could not handle, say, a quantum leap from a 1,000-deal portfolio to a 10,000-deal portfolio, the system will give most users some latitude for future growth.

For users that already have the FUTRAK back office in place, Orchestra will provide an integrated front-through-back office. For those who do not use FUTRAK, however, it will be important to ensure that data from Orchestra can be easily transferred into the existing back office system.

Orchestra's front office functionality, including deal capture and trade blotter screens, are quite user-friendly. Furthermore, the deal configuration screens are quite flexible, allowing users to mix and match predefined swap legs to create custom instruments. Likewise, these predefined templates can be modified as needed. The system's middle office features, which includes the flexible Crystal report writer, are also robust.

The system is also compatible with Reuters and other market data feeds, although prices are not refreshed automatically. Instead, users must manually instruct the system to upload new prices. However, this shouldn't be a problem for most mid-sized dealers who may only recalculate P&L on an intraday basis.

The Orchestra system itself includes various levels of security. User profiles can be configured so users have access only to parts of the system that are directly relevant to their jobs. We believe that this sort of security can help prevent errors and give managers a certain degree of control. On the data side, however, the security built into Microsoft Access, particularly when it is used with Windows 95, is minimal and data could conceivably be changed through the "back door." When the system is used on a stand-alone PC, this loophole can easily be closed by maintaining the PC in a physically secure environment; in a networked environment, the Windows NT version of the software would provide better security.

In short, for firms that do not require a high-capacity data architecture, Orchestra may provide a reasonably priced alternative with almost all the functionality of more heavy-duty dealer systems.

The New York City­based Fusion Systems Group is a consulting firm that provides systems implementation consulting to banks and broker-dealers.

What it is: An interest rate risk management system for the front and middle office

Operating platform: Windows 95, Windows NT

Data platform: Microsoft Access

Instrument coverage: Caps/floors/collars/corridors, cash flows, currency swaps, exchange and OTC interest rate options, financial futures, FRAs, index amortizing swaps, interest rate swaps, interest rate swaptions, loans and deposits, bonds and options on bonds, medium-term notes, FRNS, CPs, CDs, BAs

Risk management capabilities include: VAR, volatility, correlation, stress testing, maturity gap analysis, interest rate, FX and basis risk, calculation of all the "Greeks," liquidity risk, model risk

Price: $25,000-$75,000 annual charge which includes full support and maintenance; varies according to number of user licenses and total notional under management.

 

Company: INSSINC

Founded: 1983

Other products: FUTRAK (DOS-based back office system); FACTS (FX front office)

For more information, contact: Frank Fronzo

Address: 300 Broadacres Drive, Bloomfield, NJ 07003

Phone: (201) 338-0321

Fax: (201) 338-0397

Web site: http//www.inssinc.com