Indeval: innovation with prescriptive analytics
A marketplace of mayhem
On May 6, 2010, the Dow Jones Industrial average plummeted nearly 1,000 points (almost 10 percent) in a matter of minutes. It became known as the Flash Crash.
A few weeks later, the dust had cleared. Wall Street and the United States government were among many looking for a cause. A joint report from the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) was released, but theories continued to abound, including placing the blame on high-frequency trading, changes in market structure and, most disturbing, technical glitches.
Central Securities Depositories (CSD) are widely considered to be the central hub of each country's securities marketpost trade infrastructure. They offer two critical services at their core. One is a provision of services related to the custody and management of securities retained on behalf of the financial community and investing public. The other is the efficient settlement of securities transactions.
However, the existence of the CSDs is usually ignored—until something goes wrong. The various collapses of the banking industry, particularly Lehman Brothers in 2008, illustrate the importance of settling securities transactions as quickly as possible to reduce the losses associated with outstanding stock trades.
Near real time settlement
Indeval, Mexico's Central Securities Depository, is breaking new ground as the world's first CSD to operate in near real time. The Securities Settlement System (SSS) is called Dalí and is built on IBM ILOG CPLEX Optimization Studio.
IBM has been a major contributor to this field since the 1960s, developing and commercializing many of the statistical and mathematical techniques of advanced analytics. IBM ILOG Optimization helps companies quickly determine how to most effectively use limited resources.
The process of developing and transitioning to Dalí was not a simple one. Indeval needed the entire support of the Mexican financial community. This involved the coordination of all the direct market players, including financial authorities and more than 100 intermediaries, some of whom were reluctant at first to change their operating procedures.
"As the largest payment and securities settlement system in the financial sector, Indeval is helping mitigate the risk involved in transactions settlement and diverting the worst effects of the systemic crisis," said Jaime Villasenor, chief risk officer at Indeval.
The risk paid off. Indeval and the participating organizations have been rewarded for their commitment with a system that has delivered benefits to the market participants directly attributable to operations research. Because their clearing and settlement module reduces liquidity requirements by more than 52 percent, financial intermediaries have been able to save more than US$240 million in intraday interest cost during Dalí's first 18 months of operations.
Indeval itself was the recipient of the 2010 Franz Edelman Award for Achievement in Operations Research and the Management Sciences. The competition attests to the contributions of operations research in the profit and nonprofit sectors.
Today, Dalí settles securities operations that average over $250 billion daily―more than 70% of the value settled in the Mexican payments system. Thus, an amount close to the Mexican gross domestic product (GDP) is settled in five operating days.
At the heart of Indeval's Dalí securities settlement system, the IBM ILOG CPLEX Optimizers match thousands of transactions simultaneously, so that only net amounts of securities and cash have to be transferred among the participating financial institutions. Thanks to this application of advanced analytics, many transactions that would remain pending if they were processed individually are settled together, thus reducing liquidity requirements dramatically—by 52 percent in cash and 26 percent in securities. The most important benefit of the implementation of operations research in Indeval’s securities settlement system is the enhancement and strengthening of the Mexican financial infrastructure.