White Paper

The Quantum-inspired algorithm for collateral optimization

QUBO - Quadratic Unconstrained Binary Optimization

Finance in the era of Quantum Computing

Organisations in the Financial Services industry operate in a highly complex trading conditions, with significant operational and economic consequences. Financial services companies, who are aware that Quantum Supremacy will give rise to a new era in information technology thanks to unprecedented computing power, are increasingly investing in Quantum Computing.

The Financial Services sector – particularly investment banks – faces several optimization challenges, from detecting market instability and developing trading strategies, to optimizing portfolios, financial forecasts, market simulations, determining asset prices and rebalancing statutory reserves in the field of insurance. Quantum Collateral Optimization is only the first use case. Its success proves how Quantum Computing can really transform complexity (and the burden of regulation) into a competitive advantage, even against an ever-changing economic backdrop.

Collateral Management
with Quantum Computing

In light of the credit rationing that has affected the whole banking industry due to the recent economic and financial crises, managing collateral (and, more generally, liquidity) correctly has become even more important. In terms of technology, it is a dynamic optimization problem, as the database that needs to be managed, the rules that need to be considered and the response that needs to be allocated all change on a daily basis. Having sufficient computational power and algorithm flexibility is therefore key to managing complex problems.

Reply has started a project in collaboration with the Investment Banking Division of one of Italy’s main players in the financial arena. The project focusses on risks and treasury liquidity management, from context-defining indicators to the optimization of collateral credit. Quantum Inspired techniques have made it possible to create a model able to optimize collateral credit exposure in order to generate real value/benefits within a regulatory framework that is constantly evolving, forcing operators to adapt quickly.

QUBO model

Qubo is the acronym for Quadratic Unconstrained Binary Optimization.

It is a model designed to solve quadratic combinational optimization problems with binary variables where, unlike traditional algorithms, the entire model fits within a penalty matrix which makes the mathematical formulation elegant and compact.

This flexible, high-performance model lends itself to parallelization thanks to its compact structure. It is also able to manage high levels of complexity, while remaining extremely fast regardless of the number of constraints. Continuously evolving regulations, the concentration constraint (which must be included in optimization ex ante), and managing specific market conditions can be seen as resolved challenges or, at least, challenges that can be overcome in time.

Where Reply can make the difference

As well as its proven Risk Management and Regulatory & Credit experience in the Financial Services market, Reply, has had multidisciplinary teams exclusively dedicated to Quantum Computing for the past 2 years. They have forged partnerships and practices aimed to test this technology’s disruptive potential.

Reply’s added value is built on its constant focus on innovation, on its experience in the fields of Risk Management and Regulatory & Credit, and on its specific expertise in the study of Quantum Computers and Quantum Algorithms, developed both through experimental and lab activities and through real-life projects. Reply’s goal is to use knowledge to contribute to the process of creating value for its Clients, even in the Age of Quantum Supremacy.