Overview
In this episode Scott Sobolewski, Co-Head of Quantitative Services, discusses the Open Source Risk Engine (ORE), a powerful and versatile tool for pricing and risk modeling of financial derivatives. ORE is available for free and is already being used by a number of financial institutions to support their risk management and regulatory compliance activities.
Listen now to discover the recently expanded functionality and how firms are extending the software for individual use cases.
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Hello and welcome to Ahead of the Curve, the podcast from Acadia,where we take time to get under the skin of the risk,margin and collateral industry to dig deep and presenttopical perspectives and insights on this hugely important sector.Now it's time we talked about ORE. For those of younot in the know, ORE or Open-Source Risk Engineis Acadia's widely respected open source software projectdesigned for contemporary pricing and risk analyticsof a whole range of traded financial products.It was first developed by Dublin-based Quaternion,which is now part of Acadia, which, of course,itself is now part of the London Stock Exchangeand has been a leading player in the risk software space since 2016.The key to ORE is its open-source structure.Anyone using ORE has full control and oversight over how they deploy it.ORE itself is already in its 10th release to the market.What does the future hold for this innovative software system?Well, to discuss that, I'm delighted to be joinedin the studio by Scott Sobolewski, partner in Quantitative Serviceswith Acadia. Scott, welcome to the studio. -Thanks, John. Very happy to be back.It's great to have you here. Let's take a step back here first.We're talking about ORE, but let's look at the big picture.What is ORE, and why is it so important? -We think it's the industry.The first of its kind. Open source, completely free, transparent pricingand risk library for derivatives, structured products,and any other traded financial instrument. The core softwarewe've been using internally for our commercial services, consulting,and hosted services, I'd say, for the last 15 plus years.It wasn't until the last year or two that we've decided to releasethe vast majority of our expanded functionalityand product coverage out into the open source domainstarting middle of last year, middle of 2022with a series of quarterly releases that right now essentially givesyou equivalent functionality to what's availableon our hosted commercial services across the 1,000 plus clientsthat Acadia currently supports on a commercial basis.It's not something that's entirely new, is it?ORE has been with us, has been part of Acadianow for a little while. -Yes, the original companythat you mentioned there, Quaternion Risk Managementstarted in 2010, 2011, and the founding partners of that companywere using quant lib in the early 2000 and started extending quant lib,a separate parallel open-source pricing project for derivatives, addingfunctional risk and simulation layers on top of the quantlib functionality, and also expanding the product coveragethere out into the exotic space. They were doing that in previous riskand finance, and IT roles at European banks,and around the time of the financial crisishad several consulting opportunities coming out of 2009, 2010,and that was kind of how Quaternions started. You mentioned the acquisitionby Acadia, I'd say three or four years ago,and then now by the London Stock Exchange Group.It's certainly been a nice validation of the core functionality within ORE,which is set at the core of Quaternion and Acadia for its hosted services.We often get the question, if the software is so great,why are you giving it away for free? We do feel thatthrough this series of acquisitions, it's been a nice kind of validationby the market that there is something valuable there,and people are willing to pay for it, albeit froman open-source standpoint, our clients don't have to.Yes, absolutely. Both of those acquisitions, Quaternion,under the London Stock Exchange covered here on this podcast as well.We've been on that journey with you. -It's been an exciting one.It has definitely. Let's just get into a bit more detail now,though, Scott. How does ORE work?What are the use cases in particular? -Yes, we've seen two or threeprimary use cases for open source ORE over the last decade.The most popular one has been all banks of pretty much any size,from your large tier one investment banks down to smaller regional commercial banksreplacing legacy expensive vendor software,tend to be a bit more of a black box, which a lot of our clientsare facing increased regulatory pressures over the last 10 or 15 years.You can no longer just defer to a vendor, prescribe methodology,and need to demonstrate ownership and control of the type of risk modelsand pricing tools that you're using internally.We feel very strongly that the transparencyafforded by an open-source software like ORE goes a very long wayin winning regulatory approvals and internal model validation approvalsfrom internal model governance functions. Replacement of legacysoftware, and then also, I mentioned model validation.Oftentimes, our clients have independent model validation groupswho are responsible for putting the stamp of approvalon models that get developed within the front office or risk functions.Those model validation groups are often forced to developparallel implementations of the same or similar methodologythat they're validating. Those model validation groupshave found tremendous value in using ORE as a starting pointfor those parallel model implementations. It gets them 90, 95% of the way therewithout having to recreate the wheel each time they want to goand develop a new model for the front office or risk functions.It saves tremendous time, energy, resources,and cost for clients who are using ORE as a model validation tool locally.Acadia, for the last five or six years, has been supporting the vast majorityof the non-clear derivatives market through compliancewith the uncleared margin rules, which dictate that clientsneed to post initial margin for the very first timeon those bilateral derivatives trades. There has been intense regulatory scrutinyon the models that determine the initial margin amount.In most global jurisdictions, banks and even certain buy-side firmslike hedge funds need to apply for regulatory approval of those models.Acadia, through its hosted commercial offerings,offers calculation services to comply with those regulations,and the fact that the same library that clients are usingon a daily outsource basis is available, open sourceallows them to poke around the source code and allows greater visibilityand transparency for those model validationteams, and even for regulators to have a comfort and understandingof the models that we're using to determine those marginamounts. -That transparency that you referred toin the open-source nature of ORE is a very important element there.The open-source approach is an essential factor to ORE,and that's clear, but what kind of ongoing supportcan clients expect if and when they adopt? Are they on their own,or are you part of the support program? -They can be on their own.I'd say the majority of the time, we don't have visibilityinto who's using the open source tools. We would love to knoweveryone who's downloading and forking our code locally,but that's part of the beauty of the open-source nature.You can use it, you can extend it locally. You don't have to contribute anything backto the open-source community. We do encourage it.We do operate a very active community user forum,both on our open-source risk website and internally at Acadia.Acadia, at its core, is a community-driven industry modelwhere, essentially an industry utility for the non-cleared margin space.Everything that we do has the financial community in mind,and we run very active monthly and weekly support groups.Organizing ways to help people. -Increasing communication and offeringservices that help the entire industry comply with global regulations.I won't lie, there is a commercial element and justificationfor our interest in open-sourcing these tools.We are not a software vendor. We don't want to be in that business,but we do hope to work with clients on a consulting basisto help them implement ORE locally if they're resource-constrainedor help them extend or customize, or ease functionalitylocally for specific bespoke use cases internally.There's still a big cost benefit there for the clientreplacing a legacy vendor system that's several hundred thousand dollarsor even seven figures plus annually from a license,subscription fee perspective, replacing thatwith a free open-source software that has equivalent functionalityto those vendor systems. Maybe you're paying a one-time,six-month consulting fee to get that software upand running for the very first time. However, it removes any kind of legacy,long-term subscription fee. Once you get it up and running,and you have a team that's educated that can support that softwareand own that software going forward, it saves, uh, tremendous bottom-line costsfor clients on a long-term basis. -You mentioned those clientsthere as well. Scott, give me a sense of the typesof clients that you see deploying ORE with whom you're having conversations.Yes, I mentioned the transparency that ORE affords,and generally, ORE is being used most widely by clientsfacing those increased regulatory pressures.These days, that's generally the larger banksin most global jurisdictions replacing their black box systemsthat they have had trouble justifying to regulators in the past,replacing that with ORE and demonstrating greater control.Certain analytics that have been particularly popularover the last several years have been in the valuation adjustmentspace, the XVAs. Clients ripping out expensive front officeand risk XVA systems, replacing that functionality with ORE.Similarly, in the regulatory capital management space,replacing market risk, VAR systems, for example,or counterparty credit risk exposure simulation systemsfor credit risk capital. All of that functionality is availableout of the box within ORE, and even though Acadia is knownas a kind of margin utility for the industry, Acadia,in its hosted services, is probably only using ten or 15% of the functionalityavailable in ORE. I would definitely encourage everyoneout there to check out all that expanded functionality.We have lots of 50-plus examples available out of the box,where you can get a sense of the expanded functionality coveragewithin ORE beyond just the margin space. -I guess it's like you've described it,is a community out there, isn't it, that's using ORE?How do people get more involved or understand what it offers more?I know you've recently launched the ORE Academy.What does that do, and what does that bringto the table as well? -Yes, the ORE Academy is a YouTube channelthat we launched earlier this year that has several prerecorded videosto aid in getting set up with ORE for the first time,talking through how to compile ORE locally, or evenjust gain access to ORE locally if you're not so technical.It also has a series of walkthroughs for relevant examplesin the market and credit risk space. Even without getting into the weedsof the source code, you can still run out-of-the-box examplesthat will give you a value at risk calculationor an exposure simulation with all your preset assumptionsand calibration settings already self-contained within eachof those examples. -You don't have to be an expert.You have some basic knowledge, but you can use this out of the box.Exactly, yes. We are also investing very heavilyin continuing to propagate ORE as a teaching toolfor the next generation of risk users. Generally, if you're in a mastersor PhD program, you learn a ton about the underlying methodology,but you have to wait until you get that first or second jobto get your hands on, production software that's usedat these large banks, those are generally not available in learning formwhen you're first getting into the industry.We have a newly established partnership with Northeastern University this summer,where we will be using ORE as the center of a six month certificate programlaunching early next year, where we're hoping to use OREto teach the next generation of quant risk professionals, giving themhands-on experience of a production softwarelike ORE earlier on in their career, or facilitating careerchanges for learners who want to make a careerchange and get deeper into the quant risk spaceand knowing what they're getting into before they take that next step.Well, it's clear, Scott, that ORE is going to keep you busyfor the time being. Unfortunately, though, we're out of time now,but thank you very much indeed for joining us on Ahead of the Curve.Thanks, John, and I'll just mention lastly,opensourcerisk.org is the landing page, and you'll be able to findall the resources we mentioned on that website.That's great. Thank you, Scott. -Awesome. Thanks, John.Thank you for listening to and watching ahead of the curve.We'd like to know what you think, so please do get in touchand share your thoughts, and you can find out more about Acadiaby going to Acadia.inc, but until next time, it's goodbye from us.
