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Case Study: Cooperative banking group on the road towards comprehensive portfolio analysis

© Joachim Löning

How does one integrate a portfolio optimization solution into a core banking system?

The migration of all Volksbanken and Raiffeisenbanken to agree21, the new core banking system of the cooperative financial services network, is the largest project of this kind in the group’s history to date. And the magnitude of the project alone was not the only challenge: in addition, to enable a comprehensive portfolio advisory the new banking system required the incorporation of a system-wide tool for providing advice on securities – one that gives advisors an intuitive visualization in hand for the customer consultation.

But how does one integrate the components of such a specific portfolio-advisory solution with optimization into a software-environment as vast as agree21?

On the specifics of portfolio optimization and the integration of software components

The construction of an application as specialised as a portfolio optimization is not an easy matter for a banking system provider such as Fiducia and GAD IT AG. First of all, in order to perform the necessary analysis and optimization, the calculation cores are required. These calculation cores in turn require quality-assured and refined data in order to display portfolios with clean calculations at an individual security level. At the same time, the user interface must be designed to express the information in an intuitive and understandable manner for all parties whilst complying with regulatory requirements.

Although for some time many banking groups have been attempting to build as many solutions as possible themselves, this was not, in this case, an option. On the grounds of the complexity of the subject, it was clear for Fiducia and GAD IT AG that the fastest and most efficient way to reach a portfolio optimization solution in agree21 was through a cooperation. tetralog, with an ecosystem of established software modules and calculation cores that have been continually developed for over 20 years and can be used flexibly via Application Programming Interfaces (APIs), made the perfect partner. The modular structure of the calculation cores, in combination with the flexibility of the accompanying highly available datafeed platform – which in turn was extended during the course of the project with an individual module for the synthesis of certificate products – allowed the development of efficient development of an implantation for the sophisticated requirements of Fiducia and GAD IT AG.

After the breakthrough: what possibilities does agree21Optifolio offer in terms of portfolio optimization?

Since the introduction of MiFID and its regulatory constraints concerning product risks, banks and advisors have been searching for possibilities to effectively approach portfolio advisory. A portfolio risk class coordinated with the product risk classes will enable diversification effects to be taken into account in advisories with agree21 Optifolio. The advisory no longer needs assign every security in accordance with its individual risk class but can instead consult through a portfolio risk class represented by a recommended risk corridor. In addition, the software allows for portfolio optimization according to Harry M. Markowitz – his Nobel Prize-winning findings on modern portfolio theory form the basis for many of the analysis and optimization functionalities that form the core of the tetralog software offering.

In order to determine the diversification effects of DZ BANK’s certificates, we developed a web service named Certificate TED, which processes available data on the underlying instrument in order to synthesize time series for almost all types of certificates. These time series are then consumed by the corresponding calculation cores via an API. This not only enables an adequate evaluation of a certificate’s contribution to portfolios’ risk and expected return, but also a comprehensive portfolio optimization utilizing structured products.

We are especially proud of the fact that one of our favorite topics – the visualization of dependencies, relations and complex correlations – is even visible through agree21’s user interface. Our interactive spider widget, inspired by the concept of gamification and the gesture control of multi-touch screens, is the cornerstone of the advisory. As an interactive graphic, the “Spider” not only brings together intangible assets such as portfolio, diversification, risk and return in a single representation, but it also makes them tangible in the digital world.

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