The risk management business is alive and well, judging from the number of bright new entrants that make their way into the market each year.

By Karen Spinner

These newcomers believe that their well-entrenched rivals are tied to older technologies that are quickly becoming passé. By designing systems from scratch they hope to play technological leapfrog and capture the attention of technologically savvy systems buyers. Others hope to offer some of the sophisticated analytical tools sold by their competitors at a fraction of the price.

Here are six firms that have recently arrived on the derivatives scene. Some are likely to make their mark in a big way. After all, a few years ago, today's industry leaders were neophytes still wet behind the ears.

Kamakura: Eyes on the U.S. Market

Kamakura, a Tokyo-based risk management and consulting firm, has set its sights on making inroads into the U.S. market. It's core product is Kamakura Risk Manager, a front- and middle-office analytic system for fixed-income and equity derivatives.

"My goal was to blend consulting services with a relatively generic software product,'' says Don van Deventer, the firm's founder, who was a former treasurer at First Interstate Bank. "We feel this is a good approach, because typically financial institutions require some assistance setting up their risk management goals before they even consider buying software." Although the firm was initially started in Tokyo, software clients are now evenly split between Japan and the United States.

In the future, van Deventer predicts that credit risk-another area of concentration for Kamakura-will become increasingly important as banks and brokerages begin to apply more quantitative analyses to their credit exposures and begin to consider the interrelationships between credit and market risk.

Robert Jarrow, a professor at Cornell University's School of Investment Management who is best known for the Heath Jarrow Morton interest rate term-structure model, also serves as Kamakura's director of research. One of his latest projects is a model that can be used to determine correlations between interest rate movements and credit risk. Another Kamakura researcher, Kenji Imae, has recently completed a book entitled Financial Risk Analytics: A Term Structure Model Approach for Banking, Insurance and Investment Management, which is now available through Irwin Publishers.

Kamakura says one of its biggest strengths is the way it integrates term-structure theory into its risk measurement models. Term structure models, which include probability assumptions of future interest rates and take as given a market environment free of risk-less arbitrage, can be used in the context of value-at-risk models in order to look at the effects of a nonparallel shift in the yield curve. Traditional bond math, on the other hand, provides a less realistic picture of the interest rate markets. Duration analysis, for example, which is actually a limited form of term structure modeling, can only handle parallel shifts in the yield curve and, when combined with 'randomly' generated market factors, can actually produce a yield curve that includes negative interest rates. Says van Deventer, "Very few software firms incorporate advanced term structure models."

Another area that Kamakura has in its sights is giving banks the ability to incorporate both traditional, liquid assets and nontraditional, proprietary assets such as deposits or consumer credit within the same risk management framework. "Bob Jarrow is working on this problem, particularly in the case of assets which include embedded options that might be exercised irrationally," says van Deventer. "This sort of irrational exercise would apply, for example, to mortgages that might be refinanced for a variety of reasons that have nothing to do with interest rates."

As theories and models evolve, Kamakura will rapidly bring them to market within its software offerings. Says van Deventer, "We want to use new research as fast as we can, and our commitment to being on the cutting edge is perhaps our greatest strength."

Company: Kamakura

Founded: 1990

Public/Private: Privately held

Overview: Kamakura was established in 1990 to introduce and implement sophisticated asset and liability management systems and risk management valuation techniques for leading financial institutions. Today, Kamakura is the largest risk management consulting and software company in the Pacific Rim, and the firm is developing a growing presence in the United States. Kamakura devotes significant time and resources to academic research and software development in such areas as asset valuation, derivatives pricing and asset/liability management, the objective being to shorten the time horizon from academic development of new financial theory to its practical application.

Products include: Kamakura Risk Manager, a front-office, term-structure-based financial decision support system designed for treasury managers, risk managers, investment managers, securities traders and derivatives dealers who need to quantify and hedge complex fixed-income and multicurrency risks.

Analytics include: six different methods of yield curve smoothing; five term structure models, numerical solution methods ranging from finite difference to trinomial lattice to Monte Carlo; three methods for calculating Value-at-Risk; and option-adjusted stress testing on six different sensitivities.

Data platform requirements: Any ODBC compliant database, including Oracle, dB2, Sybase and the like. Kamakura risk Manager is designed to maximize use of existing client databases.

Hardware requirements: Windows NT, UNIX

Development partners: ADS Associates, the real-time dealing and trading systems company. All Kamakura risk Manager analytics are embedded in ADS' Global Trader Software.

Pricing: Perpetual license fee U.S. $100,000­$750,000 plus an 18 percent annual maintenance fee. Source code is available with full support on a contractual basis.

Headquarters: Japan
Support offices: New York, Los Angeles, Silicon Valley, Ithaca, NY
Address: 100 Park Avenue, Suite 1600, New York, NY 10017
Phone: Jonathan Levin (director of operations, America), at (212) 880-6466
Fax: (212) 880-6468
E-mail: 76604.13@compuserve.com

Visible Decisions: Coming Into Focus

Visualization technology shows every indication of breaking out of IT development labs and onto the desktops of risk managers worldwide. "Visualization technology is an ideal vehicle to view risk management and market data," says Bill Wright, chief designer and a principal of Visible Decisions. "It can make complex reports jump off the page and make immediate intuitive sense."

Visible Decisions, founded in 1992, wants to take advantage of the technology's increasing acceptance in the finance arena. One of a handful of companies specializing in visualization, Visible Decisions faces competition from Pittsburgh-based NEOVISION, which offers the popular "Heatmaps" trading tools, and London-based Leading Markets Technology. Wright, however, is not worried: "I actually see the emergence of competition as a positive development. It means the technology is gaining greater acceptance in the market at large." This greater acceptance, in turn, has lead to some ambitious products. The intranet, a portion of the larger Internet cordoned off by "fire walls," has become an increasingly critical vehicle for firm-wide communication at many of the largest banks, and Visible Decisions is poised to benefit from the intranet revolution already underway.

For example, Visible Decisions is using VRML, a three-dimensional Web language and next-generation cousin to the ever-popular HTML, to create Distributed Discovery, a company-wide reporting tool aimed at big players in the financial markets. "Visualization over intranets is gaining interest as well. Distributed Discovery, which published VRML to thin clients, allows financial institutions and corporates to give thousands of users access to high-level, graphical analytics at a very low per-user price tag," says Wright. Distributed Discovery will utilize low-tech Web browsers to distribute VRML reports, which have many applications for risk management reporting, derivatives trading and "plain vanilla" equity and bond trading.

Visible Decisions is a Sun Microsystems development partner, and the firm is busy developing a suite of visualization tools for Java. This Java connection will become particularly important if Sun Microsystems' widely hyped Java stations and the Netra j line of Java-based servers take off. Wright says he will be announcing Java applications shortly.

Meanwhile, Visible Decisions is also hard at work on several large-scale custom development projects. One of these initiatives involves the creation of extensive internal systems for at least two major exchanges. These will include systems geared towards operations management, compliance and a public viewing gallery. One of these systems will also include a Dick Tracy-esque "investigations" module that will allow the self-regulated exchange to rapidly identify and track down irregularities.

Another development initiative involves insurance companies, which must routinely process large quantities of actuarial data as well as develop complex risk models. Mainstream corporate treasurers are also considering visualization technology to review the performance of hedges and exposures over time and to run what-if scenarios on their evolving portfolios of obligations. Visible Decisions' clients include NationsBank, CIBC and Deutsche Bank.

Company: Visible Decisions Inc.

Founded: 1992

Public/Private: Privately held

Overview: VDI is the creator of Discovery, an object-oriented tool kit designed for rapid development of 3-D business applications. Discovery allows users to create custom visualizations of critical corporate data. Discovery is also capable of handling large quantities of static and/or real time data, and both analytics and drill down capabilities are available. VDI's clients in the capital markets have used Discovery for risk management, trading analytics, order management and portfolio.

Special features: Information visualization, 3D and 4D graphics, interaction, animation, data integration (real-time feeds, databases, analytical engines), visual financial objects, real-time alerts, real-time analytics, Internet/intranet delivery.

Products include: Discovery for Developers, Distributed Discovery

Hardware requirements: UNIX (SGI, Sun, IBM, DEC or HP); Windows NT

Data platform requirements: Interfaces are available for TIBCO's TIB, Reuters SSL, OBDC, Essbase and Oracle OCI, Foreign Functions

Systems integration, consulting partners: SAIC, Logica, Andersen Consulting

Starting price: UNIX platform $30,000 (including data interfaces); Windows NT $5500

Clients include: Morgan Stanley, Chase Manhattan, Deutsche Bank, NationsBank

HQ: Toronto
Regional offices: New York, Chicago, Los Angeles, Washington, DC, Ottawa
Address: 121 King St. W., Suite 1080, Box 104, Toronto, Ontario, Canada M5H 3T9
Web site: http://www.vdi.com
E-mail: info@vizbiz.com

MathSoft: Secret Quant Weapon

MathSoft is a newcomer to financial markets, but a member of the old guard in statistical analytics. It has provided high-end statistical analytics to Fortune 1000 companies, which use MathSoft's flagship S+ development language to create sophisticated business and marketing models. The firm has only recently taken the plunge into the financial markets after a barrage of calls from curious quants led the firm to create a new division dedicated to serving Wall Street.

How are people adapting MathSoft to the derivatives markets? "I'm afraid I can't tell you exactly what our finance clients are doing with MathSoft because many of them see it as a secret weapon," says Rick Bohdanowicz, MathSoft's vice president and general manager of its Seattle office.

According to Doug Martin, the firm's founder and chief scientist, MathSoft was developed in Bell Lab's research department, which initially created the S language as a tool for modeling telecommunications solutions. Today, MathSoft licenses S from Lucent Technologies, and develops products exclusively in S. Martin explains that the S language is particularly well-suited for multidimensional data mining, which is simply the practice of analyzing large quantities of complex data, finding patterns, creating models to predict those patterns and then testing those models.

MathSoft's chief competitors include Mathematica and MatLab, both of which also started as providers of "generic analytics and then moved aggressively into the financial markets." Martin explains, however, that MathSoft has a critical advantage-the nature of the S language itself. "S is very similar to C++, and C++ application programmers find S to be very easy and natural to use. MatLab, on the other hand, is more cumbersome for the new generation of programmers, whose primary language is often C++."

In the finance world, MathSoft is particularly appealing to quants because it combines data mining with statistical models and graphical images designed to make data more intelligible. During the past few years, notes Bohdanowicz, MathSoft has built up a quiet following in the back rooms of Wall Street such that in most large trading firms one or two quants already use MathSoft to help create valuation and risk-measurement models. Furthermore, he adds that MathSoft is gaining popularity because the technology is highly object-oriented, compatible with both PCs and UNIX servers and, thus, eminently suitable for the client/server architecture, has become ubiquitous on the street.

In order to penetrate the finance markets further, MathSoft has three new developments in the works. First, it now offers a link to FAME, a popular time series database that provides excellent grist for the MathSoft modeling mill. Second, the firm will soon release the S+ GARCH product, which will help quants create volatility forecasting models more effectively. According to Martin, "Our GARCH product will let quants use historical implied volatilities to test the accuracy of their GARCH models. And S+ GARCH already comes with many preexisting flavors of GARCH." And, finally, MathSoft has just announced a development relationship with Informix in which the S+ class of objects will be compatible with Informix's recently released Universal server.

"The Universal server is an object-available database that incorporates Illustra's object-management technology with the Informix database. The 'Datablade' feature in the Universal server will allow users to bring custom objects into the database, and one of the predefined Datablade object classes will be S-Plus,'' says Martin. Bohdanowicz notes that many Wall Street clients are now interested in making S-Plus analysis available to many more users than just a few quants. "We are now looking into different ways, including the intranet, of giving literally thousands of users access to S-Plus."

Company: MathSoft

Founded: 1984

Public/Private: Public (NASDAQ: MATH)

1995 revenues: $20.8 million

Overview: S-PLUS is the premier data-analysis and modeling software for professionals in a range of industries. MathSoft also produces Axum, a technical graphing and statistics package, and MathCad, a technical calculation package.

Special features: S-PLUS is the only data analysis language based on the object-oriented S language developed at AT&T Bell Labs.

Products include: S-PLUS and add-on modules S+GARCH, S+FAMELINK, S+SpatialStats, S+DOX, and S+Wavelets

Hardware requirements: For Windows: 8 MB RAM, 25 MB hard disk space, Windows 3.1, 95 or NT; UNIX: 16 MB RAM, 65 MB hard disk space; Sun Sparc, HP 9000-700, Silicon Graphics Iris, DECStation or DECAlpha

Starting price: $1495 for Windows S-PLUS; $4400 for UNIX S-PLUS; module prices run from $395­$2200

Headquarters: Cambridge, MA
Support offices: Seattle, London
Address: MathSoft Inc. Data Product Division, 1700 Westlake Ave. N, Suite 500, Seattle, WA 98109
Phone: (800) 569-0123; (206) 283-8802
Fax: (206) 283-8691
Web site: http://www.mathsoft.com
E-mail: mktg@statsci.com

Principia: Middle-Market Mavens

Many derivatives vendors focus the lion's share of their attention on the top 20 global banks. Principia has focused its efforts on serving the middle-market derivatives dealers and end-users who are often afraid of becoming "just a number" at larger derivatives software vendors.

At two years old, Principia is beginning to outgrow its reputation as a "new" software company. "We are reaching the state where our new prospects are no longer asking us if we are going to be around for the long haul,'' says Theresa Adams, one of the firm's principals and the director of sales and marketing. "We already have a track record we can point to."

Unlike many start-up software companies which are populated by wide-eyed twenty-somethings high on technological expertise and low on market experience, Principia's founders claim to have more than a century of experience in the derivatives software industry. The systems had its origins in Republic National Bank's front-, middle- and back-office software, which its founders had developed subsequent to building a similar system at Mercadian Capital Markets.

"Most of our clients don't want to spend a great deal of time and money on developing a custom system," says Adams. "We offer integrated front-, middle- and back-office functionality that can be installed and running live within days." For example, last year Principia installed nine client sites in a single week. "The average Principia installation takes about four hours,'' says Adams.

Principia claims to have sophisticated pricing and risk analysis techniques. "Our system allows mid-market clients to track, analyze and price very complex transactions. This ability is particularly helpful to smaller institutions which might otherwise have to rely on dealer price quotes." To increase the pricing options available to clients, Principia also offers a data service that includes vola-tility, option and swap spreads across a variety of global markets. "Let's say you are a regional bank and you have purchased a bond that is linked to the Deutsche mark. If your firm does not routinely follow the German markets, Principia's download service can help fill that gap." Principia also maintains a dedicated staff of quants who create the daily price data and are available to clients to answer valuation questions.

Attracting a top-notch staff has also remained a top priority at Principia. One of its more recent hires is back-office product manager John Fry, who formerly held the same position at Infinity, and other new managers are of the same high caliber. As of December 1996, the firm had brought aboard six new clients, and Adams was optimistic about signing a seventh by the end of 1996.

Company: Principia

Founded: January, 1995

Public/Private: Privately held

Overview: Principia Analytic Systems (PAS) is a comprehensive turnkey solution for derivative and risk management system needs with fully integrated front- to back-office capability employing common methodologies for valuation, hedging, credit risk, accounting and operations. Principia combines dealer-level sophistication with simplicity of installation and operation, a combination that's particularly appealing to end users and regional dealers.

Special features: Historical and closing data feeds available for rates, spreads, volatilities in multiple markets; supports path-dependent options; flexible user-defined hedging instruments

Products include: Principia Analytic Systems (supports global interest rate, foreign exchange and equity linked instruments and associated options)

Hardware requirements: Sun Sparc workstations (Solaris 2.x UNIX); A Windows NT version of Principia is scheduled for release later this year.

Clients include: Eight U.S. Federal Home Loan Banks, ITT Hartford, The Boatmen's National Bank of St. Louis, National City Bank, PNC Bank, BlackRock Financial Management, Peregrine Investment Holdings Ltd.

Headquarters: Jersey City, NJ
Address: Harborside Financial Center, 902 Plaza Two, Jersey City, NJ 07311-3902
Phone: Theresa Adams (director of marketing and sales) or Brian Donnally (manager of trading services) at (201) 946-0300
Fax: (201) 946-0320
Web site: http://www.ppllc.com
E-mail: info@ppllc.com

Triple Point: Custom Energy Systems in a Box

Founded in 1993, Triple Point's mission has always been an ambitious one. Principals Allie Rogers and Peter Armstrong came from Salomon Brothers' Phibro division, and their vision was to create both a product and a top-notch software development organization, making their hard-won knowledge of how to build an effective energy trading system available to clients on both the buy and sell sides. According to Rogers, "We are emphasizing the custom development around an integrated front-through-back-office system for large energy players. The customization piece is particularly important for large institutions with a great deal of proprietary trading activities that cannot be contained within a generic system. At a price tag of $1 million to $11/2 million, a shrink-wrapped system would be a hard sell. Custom development is intrinsic to what we do."

Earlier this year, Triple Point landed its biggest account yet-a $2.5 million contract with Morgan Stanley to build a proprietary version of the firm's TEMPEST product to handle the firm's crude oil, options, refined products and natural gas trading needs. TEMPEST, the generic software, already includes (drumroll, please) trade processing, real-time position management, mark-to-market and P&L reporting, contract administration, physical scheduling, inventory management, invoicing and credit analysis.

For Morgan Stanley, Triple Point will be developing custom modules that will provide regulatory reporting, support for physical natural gas trading and scheduling, as well exotic options basis, binary, command, quantos and extendibles. Triple Point will also integrate TEMPEST with Morgan Stanley's existing general ledger, proprietary risk management modules and clearing operations. "Systems integration is an important component of our business," says Rogers.

One of Triple Point's biggest competitors is its clients' IT departments. Many of its clients are facing the buy-or-build decision, and Rogers believes the commodities markets tend to require a much greater degree of customization than, say, interest rates or foreign exchange. This means that there is less appropriate "shrink-wrapped" software available. In the past, most energy trading firms had to resort literally to starting from scratch. By bringing their past experience and a highly extensible product to the table, hiring Triple Point is often a less expensive alternative.

Risk management is also an important component of the Triple Point solution. The firm will soon announce a strategic partnership with a risk management consultant. "Our customers tend to be at one of two strata in terms of risk management," Rogers explains. "The first group knows that they need to implement a risk management system, but they are still defining exactly what it is they need to get started. The second group already has a risk management methodology in place, but they want to move to the next level." He stresses, however, that risk management is a method, not a system, and Triple Point's new affiliation with a consulting organization will help clients flesh out their goals before developing the specifications for a large-scale system.

Company: Triple Point Technology Inc.

Founded: 1993

Public/Private: Privately held

Overview: Triple Point Technology Inc. (TPT) is a business solution firm specializing in the design and development of custom, real-time, client/server trading systems. Triple Point uses its company's technical, business and trading expertise to help customers reengineer their business processes and develop efficient trading systems. Triple Point's software products provide a comprehensive, Windows-based client/server commodities trading system. It is designed to support both physical (actual) and paper (derivatives, futures, options and swaps) commodities trading. Triple Point also offers an array of consulting services to its clients in the trading, banking and brokerage industries; services include functional requirements definition, technical specification development, business process analysis, object-oriented design, relational and object data modeling, programming, integration of third party systems and training.

Products include: TEMPEST (Energy Trading Software), TEMPEST 2000 (Energy Trading Software with expanded instrument base and functionality), NewsNet (Trader Messaging System), Franklin (Electricity Trading Software)

Hardware requirements: PC workstations, UNIX/NT Sybase server

Data platform requirements: Windows 95 or Windows NT 4.0

Starting price: Triple Point's product ranges from $300,000 to $3,000,000, based on customer needs and requirements, including numbers of sites and users.

Clients include: JP Morgan, Morgan Stanley & Co., Galaxy Energy, Koch Supply and Trading

Headquarters: Rowayton, CT
Support offices: Houston, TX; Geneva, Switzerland
Address: 71 Rowayton Ave., Rowayton CT 06853
Phone: Contact Diane Kingsbury at (203) 899-7929
Fax: (203) 831-4106
E-mail: Diane_Kingsbury@tpt.coma

Redpoint: Real-time for the Masses

During the next few years, the center of gravity for enterprise risk management will shift away from banks and brokerages and toward funds management and corporate treasuries. We're already starting to see new demand from these sectors," says Redpoint Software Inc. founder and president Rick Morgan.

Last year, Morgan left Isis, a South Africa-based systems integrator and software developer, to start Redpoint, in the hopes of bringing easy-to-implement portfolio risk management to a wide audience. The focus at Isis was to provide tool kits that leading banks such as Chemical could use to build enterprise-wide risk management solutions. Redpoint, by contrast, is more of a turnkey solution that focuses on sophisticated middleware, which manages computing resources to enhance processing speed and allows software to access data across different locations and platforms.

"Redpoint is meant for companies that are interested in pro-active enterprise risk management to capitalize on the upside potential of this technology," says Morgan. The goal, he says, is to help clients access data residing in multiple locations without having to build costly interface programs.

Redpoint says its competitors include Algorithmics, C*ATS and SunGard Capital Market's Panorama, but, explains Moran, none of these firms offers Redpoint's potential for real-time or "near-time" risk analysis. Even Panorama's widely publicized risk engine, which uses replication to copy transaction data from local databases, does not permit the sort of immediate analysis Redpoint is promising. According to Morgan, "You can't have a pro-active, intra-day ERM solution by using conventional data management approaches that just result in static reporting. Redpoint, with its real-time data aggregation technology, delivers a consolidated, event-driven view of the global data a firm requires to drive an effective risk management operation." Also, because Redpoint is designed to "sit'' unobtrusively "on top of'' an existing environment composed of diverse systems, the system tends to require less in the way of systems integration than many of its competitors.

Because Redpoint is a turnkey solution that de-emphasizes custom development, the product is designed to appeal both to mid-market banks and to funds which, while they may manage large chunks of capital, do not maintain the sort of sprawling IT infrastructure common to the biggest global banks and brokerages.

Since July 1996, Redpoint has brought aboard its first three clients, including Barcelona-based Grupo Santander and two fund-management firms. On the staffing front, the firm has brought aboard derivatives systems architects from First Union, Lehman Brothers and Sanwa; these include Russ Savanik, who manages Redpoint's business development efforts and previously headed a team at First Union that created a company-wide value-at-risk measure.

Company: Redpoint Software Inc.

Founded: 1995

Public/Private: Privately held

Overview: Redpoint's mission is to become a leading supplier of integrated risk management solutions and enterprise-wide data management systems within the world's major financial institutions and beyond. Redpoint's solutions enable banks, brokerages, fund management firms, insurance companies and corporate treasuries to manage their financial risk across asset classes, geographical regions and types of exposures.

Special features: Redpoint emphasizes the effective management of both data and computing resources. Redpoint products include practical implementations of advanced technologies designed specifically to address the areas of distributed cache management, software "parallelization" and cluster-ready architecture.

Products include: ParaFin (Manages the resource demands of processing complex analytics; uses parallel processing to allow real-time reporting); TotalRisk (Provides enterprise-wide risk management applications including VAR, liquidity analysis, stress testing, policy management, P&L, risk-adjusted return and back testing); FinWorks (Provides a tool kit for building custom trading ad risk management applications); WorldView (Redpoint's C++ API for real-time data management applications.)

Hardware: UNIX, Windows NT machines
Data platform requirements: Sybase, Oracle, Informix, SQL Server, other ODBC compliant databases
Development partners: Glassco Park, Isis
Address: 1500 West Park Drive, Suite 370, Westborough, MA 01581
Phone: 1-800-404-RISK; 508-870-0070