Structurers and Salespeople

Before LexiFi

A critical success factor for structured product sales professionals is a good understanding of their customers' goals and constraints. This requires regular, quality interactions. One way of promoting an active dialog with customers is to enable the sales force to autonomously develop risk management solutions and effectively present transaction ideas without misrepresenting derivatives risk.

A number of process and system inefficiencies potentially prevent sales teams from achieving customer intimacy:

• Structuring tools often lack elementary usability features and, as a result, remain the preserve of financial engineering "gurus." Consequently, sales professionals resort to creating their own spreadsheets, which cannot keep up with financial product innovation, instead of spending time serving customers.

  In addition, standalone spreadsheet applications have well-known limitations:

  • code is scattered across multiple documents instead of being shared. The development process is not repeatable, spreadsheets cannot be realistically maintained other than by their authors, and employers become dependent on a few individuals;
  • the consistency among data elements within a document is not guaranteed; and
  • the production of documents cannot be automated.
• Structuring tools often provide limited support for aged transactions. As a result, sales professionals are unable to provide relevant advice on seasoned deals, customers miss market opportunities, and providers forego the revenue potential of secondary market and substitution transactions.
• The lack of sales-orientated analysis tools restricts access to customers and affects the quality of interactions: clients are not necessarily willing to provide information about their goals and constraints unless they obtain something valuable in return.
• Quantitative marketing documents used to present a transaction idea potentially take hours to prepare and therefore can only be produced piecemeal. Sales teams are often helpless when a customer asks for a simulation that involves even a few market scenarios or product variations. Banks should be prepared to routinely respond to such requests.

After LexiFi

Key Features

• Precise and Exhaustive Product Definitions.   LexiFi enables users to precisely and exhaustively describe sophisticated financial products, based on any type and combination of underlyings. Contract definitions may be shared with the customer and progressively fine-tuned to converge towards an optimal solution.
• Graphical Trade Entry Screens.   Sales professionals enter the terms and conditions of proposed deals in predefined graphical trade entry screens: they specify simple parameters—e.g., a date to describe a maturity, a float to describe a notional amount—or more complex parameters—e.g., a formula to describe a complex coupon, notional amount, or payoff.
• Product Catalog.   Sales professionals use parametric product definitions in the current catalog, which defines the potential range of solutions that they may offer to customers.

  Product Catalog Salespeople use parametric product definitions to design customer solutions. Click image to enlarge.

• Event Planning.   LexiFi provides tools to systematically detect contract life cycle events and to analyze the potential behavior of a contract in the future. Users may visualize future event and payment schedules and explore all potential contract execution paths.

  Product Validation Visualize future events and cash flows derived from parametric product defintions. Click image to enlarge.

  Static Analysis Quickly identify the potential execution paths and cash flows of complex derivatives (here a worst off autocallable equity performance product). Uncertainty is represented by time-dependent bounds on the values of the contract's underlying assets. Static analysis returns an exact result as opposed to a model-generated estimate. Click image to enlarge.

  LexiFi's formal product description and related tools improve communication between parties and help "debug" legally binding natural language documents.
• Pricing.   LexiFi users link MLFi contract definitions with internally developed or commercially available valuation libraries, or get started immediately with a collection of industry-standard models delivered by LexiFi, to value complex products and perform pre-trade risk analyses.
• Simulation of Contract's Execution.   LexiFi users may simulate the execution of a contract through time for a given market scenario, record the cash flows derived from the contract along the simulated path, and calculate summary performance metrics such as an annual return.

  Scenarios may be historical or forward-looking:

  • historical scenarios reflect the past evolution of the contract's underlyings and are used to quantify the performance of the product as if it had been acquired in the past;
  • hypothetical, forward-looking scenarios are qualitative and may reflect the customer's view, the provider's view, or a consensus forecast.

  The simulated execution of a contract provides an intuitive understanding of the proposed transaction and, ultimately, helps to validate a marketing idea.

  Historical Simulation Compare the performance of a structured product to that of its underlying assets for a range of historical acquisition dates. Click image to enlarge.

• Simulation of Secondary Market Prices.   LexiFi users may also calculate the evolution of a contract's value over a set of future dates. LexiFi simulates the evolution of the contract as life cycle events unfold, records cash flows that occur between today and each future valuation date, and calculates the value of the residual contract.

  To support the calculation of future prices, scenarios must describe the joint evolution of market data and pricing model parameters. This includes all yield curves, exchange rates, underlying information (e.g., spot price, dividends, repo rates, volatilities, etc.), and correlation matrices.

  The simulation of secondary market prices helps banks to properly represent derivatives risk and enables structured product buyers to quantify the impact through time of a proposed products on internal limits.

  Simulation and Pricing Analyze the behavior of a contract along one or more market scenarios and calculate its residual value on future horizon dates. Click image to enlarge.

• Term Sheets   Once users are satisfied that the proposed deal behaves as expected, they automatically generate a term sheet that summarizes the salient features of the transaction and translates the graphical trade entry screen's formulas into formal mathematical expressions.

  Term Sheets Specify contract terms and conditions and automatically generate precise term sheets.
  Graphical trade entry screen Click image to enlarge.		Term Sheet Click image to open document (PDF).

• Marketing Documents.   LexiFi turns Microsoft Excel into a powerful and easy-to-use content aggregator that sales professionals may tailor according to their requirements. Users may rapidly assemble informative and consistent marketing documents and term sheets that consolidate contract definition, simulation, pricing, and event planning information. All analyses are based on a single product specification. LexiFi ensures that the consistency among all input and output elements is maintained. The production of marketing documents may be scheduled and automated.

  Marketing Documents Create informative marketing documents and term sheets with Microsoft Excel.
  Himalaya Analysis Click image to enlarge.		Corridor Analysis Click image to enlarge.

• Customer Reporting.   Sales professionals may keep customers informed of life cycle events on existing transactions and report on the value of their clients' positions. LexiFi implements a formal operational model to systematically detect and process contract life cycle events. This model guarantees that pricing code is always synchronized with each contract's state and therefore automates ongoing portfolio valuation.

  Tailored Customer Reports Monitor the execution of structured products and insert a summary of past life cycle events in client reports. Click image to enlarge.

• Original Pre-Trade and Post-Trade Services.   Providers of structured products may choose to offer original pre-trade and post-trade services by delivering tailored applications to their customers. At inception of a deal, the salesperson provides an electronic marketing pack made up of a set of compatible modules—e.g., definition of the proposed product, valuation model implementation provided by the investment bank or by a third-party, simulation tools, and market data. During the life of the product, the customer periodically downloads the current product definition that reflects past life cycle events, and market data required to value the position.

Business Benefits

• Increase Revenue Opportunities.    LexiFi promotes an active dialog between the sales team and customers. Regular, quality interactions create customer intimacy and provide opportunities to develop effective customer solutions and to expand the range of structured product applications. The results are increased customer satisfaction and stronger relationships.
• Improve Skills.   LexiFi helps users to develop an intuitive understanding of structured products and their application to complex customer problems. LexiFi increases the skills, situational fluency, and comfort levels of the sales force.
• Increase Productivity.  The sales team focuses on value-added tasks and does not waste time developing complex spreadsheets. Better analytical tools also translate into improved success rates.
• Reduce Operational Risk.   A formal contract definition and shared simulation results improve communication and increase transparency among stakeholders, which means fewer errors, delays, and disputes.
• Limit Legal Exposure on Derivatives Sales.  LexiFi helps sales professionals to provide a balanced picture of the risks and potential financial consequences for the customer of accepting the terms of the proposed transaction. Fact-based sales practices reduce the risk of misrepresentation, which constitutes a potentially damaging threat for the seller.

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