IBM TJ Watson Research Center

Collateralized Debt Obligation Pricing on the Cell/B.E. -- A preliminary Result

Lurng-Kuo Liu Virat Agarwal

2007 IBM Corporation

IBM TJ Watson Research Center

Outline
Objective Objecti e Collateralized Debt Obligation Basics CDO on the Cell/B.E. A preliminary result Conclusion

CDO Pricing on Cell/Lurng-Kuo Liu/Virat Agarwal

2007 IBM Corporation

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Objective j
Objective Demonstrate the competitive edge of the Cell/B.E. on CDO pricing using Monte Carlo simulation with Gaussian Copula No intention to develop new models for CDO pricing No Why CDO? The fastest growing sector of the asset-backed securities market. cco d g SIFMA, g oba C O issuance increased to $488.6 , global CDO ssua ce c eased $ 88 6 According to S billion in 2006, nearly twice the $249.3 billion issued in 2005. CDO is challenging to price. Monte Carlo simulation has been the most popular method for CDO valuation. Monte Carlo simulation can be very resource intensive for large CDOs CDOs. Seems to be the good fit for the Cell/B.E.

CDO Pricing on Cell/Lurng-Kuo Liu/Virat Agarwal

2007 IBM Corporation

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CDO Basics
A Collateralized Debt Obligation (CDO) is an asset-backed security backed by a diversified pool of defaultable instruments like loans, junk bonds, mortgages, etc. If the portfolio contains only credit default swaps (CDS), it is called a synthetic CDO CDO. It is structured as multiple tranches and sold to investors. Each tranche has different priority to claim on the principal. Separate out the risks by prioritize the receipt of principal among the investors.
Assets sold to the SPV Principal & interest
Cash

Cash

Funding

Mezzanine 5-30% Equity 0-5%

Loss

Originating Bank

SPV

Senior 30-70%

Detachment point - d

Attachment point - a

CDO Pricing on Cell/Lurng-Kuo Liu/Virat Agarwal

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Distribution of Losses
Loss given default amount of the ith reference obligation:

Li = (1 Ri ) N i
where Ni is the notional amount and Ri is the recover rate. The accumulated portfolio loss is
n

L(t ) = Li 1{ i t }
i= i =1

where 1{ i t } is a default indicator Cumulative loss on a given trance

Senior d a Mezzanine Equity Portfolio loss

La ,d (t ) = ( L(t ) a ) + ( L(t ) d ) + where ( x) + max( x,0)

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CDO Pricing g
Losses due to defaults (the issuer fails to satisfy the terms of the obligation) are the main source of risk as payoffs. Estimate the present value of tranche losses due to defaults default leg (floating leg) T r (u ) du
DL = E e 0
t 0

dLa ,d (t )

Calculate the present value of the premium payments weighted by the outstanding capital premium leg (fixed leg)
i r ( u ) du w 0 PL = sa ,d E i e min{max[d L(ti ) 0] d a} ), ], i =1 T

The fair price of the CDO tranche is defined to be spread such that the expected value of both legs is equal.
* sa , d =

T r ( u ) du E e 0 dLa ,d (t ) 0
t

i r ( u ) du w 0 E i e min{max[d L(ti ),0], d a} i =1 T

CDO Pricing on Cell/Lurng-Kuo Liu/Virat Agarwal

2007 IBM Corporation

IBM TJ Watson Research Center

Modeling Default Times Marginal Distributions g g

Default Defa lt time for a single firm is modeled as the first jump in a Cox process.
0 (u ) du p( > t ) = E e t 0 (u ) du p( t ) = 1 E e
t

Default intensity or hazard rate of a given firm determines its default time. time

CDO Pricing on Cell/Lurng-Kuo Liu/Virat Agarwal

2007 IBM Corporation

IBM TJ Watson Research Center

Modeling Default Times Joint Distributions g

The primary driver of loss distributions is default co codependence correlation sensitivity. The higher the correlation, the more likely extreme loss events (multiple defaults) become and th f ( lti l d f lt ) b d therefore i increases th spread of the d f a senior tranche. Need to model the join distribution of the default times (i, , j ( m) of the obligations in the portfolio Gaussian copula is one of the first to be used for modeling the dependence structure in a credit portfolio

p(1 t1,..., N tN ) = 1(F1(t1)),...,1(FN (tN ))

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Monte Carlo Simulation with Gaussian Copula p

Draw a sample Z=(Z1,,ZN) from an N-dimensional Gaussian distribution, with correlation matrix R Generate independent uniform random numbers Convert them into normal random numbers (W) by using e g Box Muller Convert e.g. Box-Muller transformation Perform Cholesky decomposition on the correlation matrix R=C.CT Generate correlated normal random numbers with X=CW Convert this sample to a correlated N-dimensional uniform vector U=(U1,UN) = (X) Turn each of these uniforms into a default time samples, by inversion: i = Fi-1(Ui) Sort the N-dimensional vector of default time in ascending order and select the default times that happen before maturity date. Use the random default times to generate the cash flow for the fixed leg and g g floating leg Discount these cash flow to get their present values Repeat the process for m times for the m-path Monte Carlo estimation * For simplicity, calibration process is not included in this work.
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Introducing Cell/B.E. v1.0

Cell/B.E. is C ll/B E i an accelerator extension t 64b Power l t t i to P
Built on a Power ecosystem Used best know system practices for processor design

Sets a new performance standard

Exploits parallelism while achieving high frequency Supercomputer attributes with extreme floating point capabilities Sustains high memory bandwidth with smart DMA controllers

First Generation Cell/B.E. 90 nm 241M transistors 235mm2 9 cores, 10 th d threads >200 GFlops (SP) >20 GFlops (DP) Up to 25 GB/s memory B/W Up to 75 GB/s I/O B/W >300 GB/s EIB Top frequency >4GHz
(observed in lab)

Designed for natural human interaction

Photo-realistic effects P di t bl real-time response Predictable l ti Virtualized resources for concurrent activities

Designed for flexibility

Wide variety of application domains Highly abstracted to highly exploitable programming models Reconfigurable I/O interfaces Virtual trusted computing environment for security

Cell/B.E. is the chip powering the Sony PS3

(Shipped in volume the US in Nov 06)
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Cell/B.E. Features
Heterogeneous multi-core system architecture SPE
SPU SPU SPU SPU SPU SPU SPU SPU

Power Processor Element for control tasks Synergistic Processor Elements for dataintensive processing
Synergistic Processor Element (SPE) consists of

SXU LS MFC
16B/cycle

SXU LS MFC

SXU LS MFC

SXU LS MFC C

SXU LS MFC C

SXU LS MFC C

SXU LS MFC C

SXU LS MFC C

EIB (up to 96B/cycle)

16B/cycle 16B/cycle 16B/cycle (2x)

Synergistic Processor Unit U it (SPU) Synergistic Memory Flow Control (MFC) Data movement and synchronization Interface to highperformance Element Interconnect Bus
11

PPE

PPU L2 L1

MIC

BIC

PXU
Dual XDRTM FlexIOTM

32B/cycle 16B/cycle

64-bit Power Architecture with VMX

2007 IBM Corporation

CDO Pricing on Cell/Lurng-Kuo Liu/Virat Agarwal

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Profiling results of the CDO p g pricing algorithm g g

Running time of various stages in CDO pricing
Cholesky Decomposition Ch l k D iti Calculate Payments Sum Payments Statistics

Computational Complexity of various stages:

Generate Correlated Random numbers

Generate Normals

Generate Normals: O(Np) Cholesky Decomposition: O(N3) Generate Correlated

Generate Default Times Sorting

Random Numbers: O(N2p) ( p) Generate Default Times: O(Np) Sort: O(pN logN) Calculate Payments: O(Np)

Using 100 firms and 100,000 paths

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Random Numbers: Mersenne Twister

Astronomical period of 219937-1, suitable for Monte Carlo Algorithm
series of shift operations on xk+n generates the output random number

2 different parallelization strategies

Optimize for a single SPE, use different (random) seeds. Fine-grain parallelism for generating a single stream.

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CDO Pricing on Cell/Lurng-Kuo Liu/Virat Agarwal

2007 IBM Corporation

IBM TJ Watson Research Center

Optimization for the SPE p

N = 624, M=397 Vector t ti f V t starting from location l ti (i+1) or (i+M) may not be quadword aligned. Computation of latter part of array requires updated data from the first M entries Data dependence

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CDO Pricing on Cell/Lurng-Kuo Liu/Virat Agarwal

2007 IBM Corporation

IBM TJ Watson Research Center

Normalized Random Numbers: Polar Method

1. Generate Random Numbers a & b 2. 2 V1 2a 1 2a-1 3. R V12 + V22 4. If R > 1, continue from STEP 1 - R1 sqrt (-2 logR/R) - X V1R1 - Y V2R1 V2 2b 1 2b-1

Optimization on SPE
U t Use two random number vectors a & b d b t Redo if condition fails for any pair of random numbers
Overheard due to skipping of perfectly normal random numbers
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Performance Comparison of RNG (MT) with other architectures

Time (in seconds) to generate 100 million random numbers in sequential and block pattern on various architectures.
* Source: http://www.math.sci.hiroshima-u.ac.jp/~m-mat/MT/SFMT/speed.html
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Performance Comparison of RNG (MT) with other architectures

P e rfo rm a n c e c o m p a ris o n o f R N G (M e rs e n e T w is te r) f i i t ) o n v a rio u s a rc h ite c tu re s
1 .6 1 .4 1 .2 B lo c k S e q u e n tia l

2 2 .1 2 0 .0 0

Time (seconds)

1 .0 0 .8

1 2 .4 1 0 .6 6 9 .9 8 .3 6 .6 6 .3

0 .6 0 .4 0 .2 0 .0 In te l_ 1 .4 In te l_ 3 .0

A M D _ 2 .4

P P C _ 1 .3 3

C e ll

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CDO Pricing on Cell/Lurng-Kuo Liu/Virat Agarwal

2007 IBM Corporation

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Performance compared with other Cell/B.E. implementations

4

Performance comparison of our optimized RNG (Mersene Twister) as compared with other Cell/B.E. implementations

7.7
Running Time (seconds)
3

2.7
1

0 Another Cell RNG (MT) SDK RNG* Our RNG

Performance comparison of our optimized RNG (with Normalization) as compared with other Cell/B.E. implementatoins
20

Running Time (seco onds)

Time (in seconds) to generate 100 million normalized random numbers on a single SPE.

18 16 14 12 10 8 6 4 2 0

32-bit 64-bit

2.3

2.2

* Vectorized Random Number generation ecto ed a do u be ge e at o available with Cell SDK 2.1
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Another Cell RNG w/N

Our RNG w/N

2007 IBM Corporation

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Correlation Matrix : Cholesky Decomposition y p

Cholesky decomposition on correlation matrix C -> LLT , where L is a NxN lower triangular matrix
M difi d version of the Gauss Algorithm Modified i f th G Al ith

Initial optimized version for a single SPE

Analyzing ways to further optimize and parallelize on the Cell.

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CDO Pricing on Cell/Lurng-Kuo Liu/Virat Agarwal

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Generating Correlated Random Numbers g

Compute N (number of firms) normalized random numbers. Vector V[0 .. N-1].

Calculate V = LV , where L is a lower triangular matrix. Cell Optimization:

Branch mispredicts compromise performance for small N. 2 load instructions (6 cycles) for each madd (6 cycles), pp inefficient use of the even pipeline. Initial performance results.
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Generating Correlated Random Numbers g

Also working on utilizing the lower triangular property of the matrix L, to achieve , better performance.

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CDO Pricing on Cell/Lurng-Kuo Liu/Virat Agarwal

2007 IBM Corporation

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Conclusions
CDO pricing is computationally intensive instead of communications intensive. We use Monte-Carlo simulation
Highly scalable among various SPEs g y g

Initial Performance results Show substantial speedup for Mersenne Twister and Normalization
as compared to other architectures

Initial results for cholesky decomposition and generating correlated

random numbers.

Cell is a good fit for financial workloads. Double precision is essential for FSS workloads
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Thank you Questions?

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CDO Pricing on Cell/Lurng-Kuo Liu/Virat Agarwal

2007 IBM Corporation