Article
August 18, 1997: Derivatives Engineering and Technology
FHLB Dallas Installs Principia for Derivatives and Bonds
The Federal Home Loan Bank of Dallas is installing the Principia
Analytics System from New Jersey-based Principia Partners to support its
derivatives and fixed income businesses. Principia's application will
replace the Catalyst derivatives system from Cats Software, which FHLB
Dallas installed last year.
Paul Joiner, senior vice president and chief financial officer at FHLB Dallas, says the bank will use Principia will to price and trade interest rate derivatives and fixed income investments. The system will also support the bank's debt issuance, balance sheet management, and counterparty credit risk management functions.
FHLB Dallas is now installing Principia on five positions at its trading facility, based at the bank's Dallas headquarters. The bank is still converting its derivatives book to the Principia application, says Joiner, though the fixed income side of installation has already gone live.
Joiner says FHLB Dallas doesn't actively trade derivatives for their own sake – rather, the bank uses these instruments "to mitigate interest rate risk on both sides of our balance sheet". Typical activities include using interest rate swaps to "convert fixed rate, floating rate or structured instruments into Libor floating rate instruments," he adds.
FHLB Dallas chose Principia for a number of reasons, says Joiner. The system provides accurate pricing of a broad range of instruments, together with the flexibility to model new derivatives, he says.
Integrated Package
"It's represents an integrated package – modeling software, a database together with daily and historical market data," says Joiner. The Principia system was also "easy to install", he adds.
FHLB Dallas installation is the ninth Federal Home Loan Bank to install Principia. Last year, the vendor announced contracts with FHLBs based in Atlanta, Boston, Cincinnati, Des Moines, Indianapolis, New York and Pittsburgh (DE&T, March 18, 1996). The Principia derivatives system was also chosen by the Virginia-based Office of Finance, which acts as a central point for the FHLBs' debt issuance.
A few months after this block deal, FHLB Dallas announced that it was installing an integrated combination of systems from Cats Software – the Catalyst derivatives application and the Carma risk management analytics engine (DE&T, June 10, 1996).
Whither Cats?
Joiner declines to comment on the fate of the Cats derivatives system at FHLB Dallas. However, Finn Christensen, vice president of corporate marketing at Cats, says if Principia is to replace any Cats software at FHLB Dallas, it will be the Catalyst derivatives system. The bank will continue to use Cats' Carma risk management system, he adds.
Christensen says Catalyst was purchased as a "stop gap measure" by FHLB Dallas, while the bank searched for a derivatives systems that "fit what they are doing". Sources at the bank confirm this version of events, though they decline further comment.
Industry observers note that FHLB Dallas was the first customer to sign up for an integrated combination of Cats' Carma and Catalyst applications. However, the vendor has recently been focusing its resources on development and marketing of enterprise-wide risk management software, with derivatives trading systems receiving less emphasis.
Last month, Cats released performance figures for Carma claiming the risk management system could process 1.8 million deals in one minute on a Pentium Pro PC (DE&T, July 21).
Financial Intermediary
FHLB Dallas is a privately owned financial intermediary aimed at supporting home ownership in five US states: Arkansas, Louisiana, Mississippi, New Mexico and Texas. The bank issues structured notes and bonds, lending the funds thus raised to smaller savings and loans houses, commercial banks and insurance companies. In common with other Federal Home Loan Banks, FHLB Dallas actively hedges the market and credit risks of its activities using a variety of complex interest rate derivatives.
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