IQ What technological changes affecting derivatives markets do you expect to see over the next year?
Mike Bodson, president and chief executive, DTCC
The most prominent technological development will likely be the introduction of industry-wide utility collateral management solutions to address the operational challenges resulting from new regulations. This trend toward creating community-based solutions, which we’ve also seen in areas like entity reference data, reflects the growing recognition among firms that deploying technological platforms individually is not nearly as efficient or cost-effective as enabling a utility to centrally manage certain non-differentiating processes.
The challenges of managing collateral in an environment dominated by legacy technology and siloed workarounds are areas of pain for many firms. With the volume of margin calls expected to increase by up to 10 times due to regulatory risk management requirements, existing operational processes and point-to-point technologies are not practical in this new world. Many processes are still manual and technologies are fragmented. Greater automation and efficiency are the only ways to avoid the trade fails, disputes and bottlenecks that are likely to rise.
Firms realise they cannot make the required technological changes alone, and that achieving the necessary degree of messaging standardisation, processing automation and inventory aggregation can only be realised through collaboration. An industry-wide margin and collateral processing utility, such as the one being developed by DTCC-Euroclear Global Collateral, will streamline collateral processing on a global basis and deliver transparency, mobility, efficiency and security to the market. It will also allow the industry to align with the primary goals of regulators to enhance transparency and strengthen systemic risk monitoring.
“Existing operational processes and point-to-point technologies are not practical in this new world”
Chris Walsh, chief executive, AcadiaSoft
New margin regulations that come into effect from September 2016 will spur the biggest technological changes affecting derivatives markets over the coming year.
The new regulations for the margining for non-centrally cleared derivatives will require mandatory exchange of bilateral IM, enhanced variation margin (VM) calculations and the segregation of collateral assets. It will also introduce possible incentives to create currency silos. For major industry participants, these regulations will take effect on September 1. While the IM component will be rolled out over several years, the VM requirement has a limited phase-in period, forcing many participants to post VM where it was not previously required. This will create significant operational challenges, which will be further complicated by the need to clear certain trades that previously went uncleared, creating a perfect storm of change across the industry.
These major rule changes have motivated an industry-wide redesign of the collateral process, with a focus on leveraging technology to increase automation and prevent disputes. No longer will the industry rely on the highly manual, dispute-prone process of having each party independently calculate and compare daily margin amounts. Instead, through industry collaboration, a new utility-based process is emerging that we refer to as straight-through-margining. With straight-through-margining, margin inputs are standard and, where possible, shared between parties. Transactions are automated through a standard central workflow, which prevents disputes by accessing these pre-agreed shared inputs, applying standard calculations and resolving differences in real time, prior to the release of margin calls. As a result, straight-through-margining will allow the significantly increased margin activity mandated by regulation to be managed without a proportional increase in operational and dispute-related costs.
The concepts that underlie straight-through-margining have been developed through collaboration among the major global banks in preparation for the mandatory exchange of IM on September 1. The development of straight-through-margining highlights the role that financial technology can play in centralising homogenous, non-core banking functions within innovative industry utilities. Straight-through-margining not only provides the potential for tremendous cost savings – it also will drive standardisation, transparency and automation across the industry.
“With straight-through-margining, margin inputs are standard and, where possible, shared between parties”
Mark Beeston, managing partner and founder, Illuminate Financial Management
It is poised to be another banner year for the evolution of derivatives market infrastructure. The wave of post-crisis regulation continues to drive multi-year deliverables that impact everything from pre-trade price discovery, trade execution and post-trade requirements.
In the pre-trade space, 2016 will see further adoption of compliance and reporting tools, such as Droit, which ensures point-of-execution compliance across the myriad complex intersections between SEF, know-your-customer, cross-border sales and clearing-house rules.
In the post-trade area, the introduction of mandatory clearing in Europe creates new challenges that will need to be met. Away from clearing, there are further new deliverables in the bilateral margin arena. Both have implications for the industry’s chosen solutions for collateral management. Here, I would expect to see widespread adoption of the ISDA SIMM initiative by risk vendors, which can assist in the bilateral margining space by integrating the ISDA SIMM as part of their offerings. The collateral universe remains hugely under-invested by large parts of the Street. AcadiaSoft has made great headway in the messaging space. The next stage of the market’s journey has to be for collateral workflow solutions, such as CloudMargin, to be adopted by the long tail of thousands of counterparts that operate their derivatives portfolios under CSAs. Broad adoption of these types of solutions is absolutely key to achieving levels of automation and straight-through processing that can dramatically reduce both cost and errors in this key risk-mitigation arena.
One of the areas we will continue to hear the most about in the financial press will be the large number of blockchain initiatives that are set to change the settlement landscape of financial markets forever. Make no mistake: blockchain is coming, but not in a way that will change the world in 2016 – no matter what the headlines might make you believe.
“Make no mistake: blockchain is coming, but not in a way that will change the world in 2016″
Per Sjöberg, chief executive, TriOptima
Seamless collaboration and interop-erability will drive new technology initiatives this year and into the future. TriOptima has already developed strong partnerships with clearing organisations around the globe to deliver ever more effective triReduce compression results to their members. Recently, we announced a collaboration between triResolve, the AcadiaSoft MarginSphere communications hub, 13 major financial institutions, and the evolving DTCC-Euroclear margin utility to deliver an automated margin solution that will meet the challenges of new regulatory margin requirements. We already offer a repository reconciliation service that automatically receives data from trade repositories and compares it to the data on our reconciliation service, triResolve, in order to identify misreported transactions.
While these efforts involve TriOptima post-trade services, they also represent strong collaborations with a broad range of partners, like AcadiaSoft, CLS, CME Group, Depository Trust & Clearing Corporation, Japan Securities Clearing Corporation, LCH.Clearnet’s SwapClear, NASDAQ, Regis-TR, and other financial institutions. Going forward, these partnerships will be crucial to creating effective services. Market participants recognise the importance of flexibility and connectivity in existing and emerging technology.
This trend is accelerating in the derivatives market for cleared and non-cleared transactions as new regulatory requirements evolve and cost-control pressures increase for all types of market participant. New initiatives in trading, clearing and other post-trade processing all build on the integration of services – some old and some new. ICAP’s recent announcement of the merging of its global broking service with Tullett Prebon’s will strengthen both entities and enable the better use of technology for their clients. A new company combining TriOptima and post-trade service providers Traiana, Euclid and Reset with ICAP’s electronic market entities, EBS and Broker-Tec, will focus on delivering automated, collaborative and efficient technology based solutions that underscore the future direction of the market.■
“Seamless collaboration and interoperability will drive new technology initiatives this year
and into the future”