Article
October 1996 - Derivatives Engineering and Technology
PNC Bank Installs Principia for Vanilla and Exotic Derivatives
Pittsburgh-based PNC Bank has licensed new derivatives trading
and risk management software from New Jersey-based Principia Partners.
Sources say the Principia Analytic Systems will support both the
bank's interest rate derivatives trading operation and its asset
liability management group. PNC has recently expanded its derivatives
trading activities and created a new capital markets division.
PNC Bank officials involved with the Principia installation could not be reached for comment by DE&T's press time. Theresa Adams, the vendor's director of sales and marketing, confirms that PNC is a new client for the vendor, but declines to comment further on the specifics of the licensing agreement.
However, a source close to the installation says PNC is using Principia's integrated front-to-back office software to cover its entire derivatives operations, including trading, portfolio hedging, credit risk management and accounting.
Complex Focus
Adams says Principia's software is designed to manage both vanilla and exotic financial products, though its focus is on the more complex instruments. "Exotic options are really our specialty," she says. Exotics covered by the Principia system include barrier, knockout, Bermuda and constant maturity treasury options. Index amortizing swaps, range floaters and periodic caps/floors are also handled.
Large US regional banks such as PNC are one of Principia's primary target markets, says Adams. "These customers have a need for a sophisticated software product – but they want it in a turnkey fashion," she says. This turnkey design enabled PNC to install the Principia Analytics System in one day, adds Adams. The system's installation process can often be completed in a matter of hours, she claims, without having vendor representatives at the client site.
Principia's software is currently offered on a Sun Microsystems Unix-based platform, says Adams. Most users run the system on Sun servers with Microsoft Windows-based PC clients, she adds. The PCs access the Unix servers via X-terminal emulation software.
New Capital Markets Group
A spokesperson for PNC says the bank has recently formed a new capital markets group, called PNC Capital Markets. This move is part of a restructuring effort intended to provide more services to corporate clients, the spokesperson adds.
Specifically, PNC Capital Markets is using derivatives to help its corporate clients hedge interest rate exposures and manage earnings volatility. The bank is focusing on trading interest rate swaps, caps/floors and swaptions for this purpose.
It remains unclear how PNC's deal with Principia will affect its installation of the Targa derivatives pricing and analysis system, jointly developed by Utah-based Theoretics and Price Waterhouse's capital markets and treasury group. Bank officials had previously planned to put the PC-based Targa system into live production by the end of the first quarter of this year (DE&T, January 22).
At that time PNC was using derivatives solely for hedging purposes, rather than actively trading such instruments. In particular, PNC officials said the bank used complex path-dependent interest rate derivatives, such as index amortizing swaps, to hedge market risks on its mortgage portfolios.
Principia Partners is a relatively new entrant in the derivatives software market – though the vendor has already made its mark in the North American market. Industry observers say Principia's sales force has caused headaches for many of its more established competitors, despite the vendor's fledgling status.
For the moment, however, Principia Partners is concentrating its sales efforts at US-based financial institutions that require exotic swaps functionality. Other Principia clients include ITT Hartford Group (DE&T, August 19) and eight of the US's Federal Home Loan banks (DE&T, March 8).
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