Solutions: Post-Trade

senior vice president, Stream, SunGard's capital markets business

Key Theme for Asian Middle Office: Automation

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This blog post was originally published on TabbFORUM.

It is well known that Asia is leading the world in the proportion of trades achieving same-day affirmation (SDA); most Asian trading venues comfortably exceed SDA rates of 90%, whereas the U.S. trading venues currently achieve 70%, on average. The automation of middle-office processes in Asia’s securities markets continues to be implemented with great vigor. This trend is undoubtedly being propelled by forthcoming regulatory requirements; yet there are other factors also driving the development.

Clients are demanding ever greater efficiency, with SDA being seen as not only best practice but an essential requirement of broker-dealer service level commitments. It is evident that error rates and the operational costs associated with them could be radically reduced, and general settlement efficiency could be significantly improved, if all details of a trade are agreed to on the day it is executed.

Of course, automation gives other benefits to broker-dealers besides merely reducing trade failure. Other examples include more reliable trade allocation, the ability to accurately monitor one’s securities lending, and the automatic alerting of corporate actions.

Recently, broker-dealers have found their clients demanding SDA, electronic confirmations and the streamlining of the settlement lifecycle. Accordingly, the relative efficiency of middle-office processing has become a means by which brokers can differentiate themselves from their competitors. A sell-side provider that proves its ability to handle increased volumes efficiently would likely attract further increasing volumes. With error mitigation, the provider can also help to keep costs down.

For brokers, the automation of post-trade processes is a no-brainer: It makes smart sense operationally and financially, and it is essential to compete and to comply with regulations. It also enables brokers to be better prepared in their processes for the inevitable future contraction of trade settlement periods.

Many Asian sell-side providers with automated middle-office processes not yet in place are urgently striving to implement them to gain a competitive advantage. Based on industry news, Australian market participants and Chinese firms are rapidly signing with system providers offering automated middle-office suites that can be implemented around existing processes.

With Asian capital markets participants seemingly leading the way in post-trade efficiency, it may only be a matter of time before electronic same-day affirmation and confirmation nears 100 percent, as would befit one of the world’s fastest growing regions.

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senior vice president, Stream, SunGard's capital markets business

ASEAN: New Trading Opportunities, New Post-Trade Demands

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The ASEAN trading link announced its launch in September 2012. The link will firmly establish the ASEAN nations as an investment and trading bloc, and is also expected to attract new foreign investment to the region, as well as provide better opportunities for local capital.

Local Asian brokerage firms will probably benefit most from the link. They are now in a better position to compete with major international brokerage houses to manage the inflow business coming from neighboring countries, and they will also now have outbound access to local exchanges. While international brokerages have already established their own networks and unilateral relationships at the individual exchanges, the ASEAN trading link will bring the local brokers up to speed.

The ASEAN trading link project is only one step towards harmonization, but it is a major step. When Bursa Malaysia and Singapore’s SGX become fully interconnected, with the Stock Exchange of Thailand to follow, the link will already have connected 70 percent of the total market capitalization of ASEAN. But with the rise in cross-border trading, many participants still need help to establish an infrastructure that can meet the new post-trade demands of international business.

The seven exchanges that will ultimately comprise the ASEAN trading link support securities denominated in all six national currencies. Additionally, the SGX is also soon to list, clear and settle (in CNH) those quoted in Chinese Renminbi as well as those denominated in Singapore, U.S., Australian and Hong Kong Dollars. Although the clearing of trades will be conducted in local currency by the exchange through which they are transacted, brokers will require platforms to manage multi-currency settlement, reporting and accounting.

Local Asian brokers will need platforms to be designed to automate workflow throughout the trade lifecycle including trade matching, account funding, margin and fee calculation, confirmations and allocations. They will also need to be sensitive to differing trade settlement periods across the exchanges, tax treatment, and regulatory obligations such as segregation, ring fencing of client funds and stocks, and legal reporting.

Brokers also require scale. They will need to efficiently handle increased volumes and a broader scope of client profiles. Perhaps most challenging in a subsequent phase, they will also be required to expand asset class coverage. While today it is equities only, bonds, funds and derivatives may also be a part of the link’s future roadmap, and post-trade platforms will need to be extremely flexible and modular to provide support for these products when needed.

All in all, the launch of ASEAN link is a key part of the process of bringing the region’s markets to the center of the international trading stage. The link has the potential to deliver a tremendous range of new business opportunities to brokers and their clients. However, the resulting operational and technology demands for post-trade processing cannot be overlooked and will need careful consideration by brokerage firms to realize this emerging business potential.

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head of post-trade securities, SunGard's capital markets business

Feast in the Front Office, Famine in the Back Office – Competitive Advantage in the Middle?

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In the capital markets industry, the front office has seen much growth and innovation in recent years supported by substantial technology changes. At the same time, the back office has seen very little investment. While it’s been a feast in the front office and a famine in the back office, can investment in the middle office now bridge the gap to help firms achieve an edge over their competition?

The front office has traditionally been viewed as the almighty revenue generator, and has benefited from several strategic changes. Access to emerging markets, algorithmic trading, high frequency trading and more have all resulted in new, high volume “stuff” being thrown over the post-trade wall.

Meanwhile, back-office systems supporting the post-trade world are often legacy, supporting an intricate historic hardwired network of information flow to-and-from CCPs, depositories, custodians, regulators, general ledgers, etc.

These back-office systems and the organizations around them often have little capacity or appetite for implementing rapid or major change. This has meant they’ve used many manual “plugs” with all the inherent errors, costs and operational risk this approach brings.

Is there a middle office middle ground?

A smart and flexible middle office system used as a global transaction management layer can help the post-trade world transform a legacy client service into a market differentiator as well as improve efficiency and risk control.

In terms of service, a competitive middle office’s orders executed in new venues or across venues and currencies should result in confirms and allocations to and from clients in real time with “no touch.”

Likewise, an explosion in volumes can be managed by a flexible netting module matching with clients, markets or introducing brokers and vastly reducing the volumes that go to a legacy back office. Accurate settlement instructions can be attached to trades for new markets, depositories or custodians for pre-settlement matching before they are passed to the back office, reducing settlement failures and increasing efficiency.

With a flexible, competitive middle office, counterparty and position risk information can be made available in real time to the risk department or even to the front office to help trading decisions, enhancing risk control.

Of course, we are discussing a middle office evolution, rather than revolution. Core books and records will remain where they’ve always been – in back-office systems – but a flexible middle-office system controlled by business and operational teams, can deliver a valuable competitive advantage.

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general manager, Stream GMI, SunGard’s capital markets business

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IS PURSUING THE DODD-FRANK END-USER CLEARING EXCEPTION WORTH THE TROUBLE?

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The Commodity Futures Trading Commission (CFTC) and the Securities Exchange Commission, (SEC) in a much anticipated ruling, have approved the final definitions of “swap” and “security-based swap.” In addition, the so-called “end-user” exceptions have been finalized.

Swap participants seeking an end-user exception will generally applaud the decision that exempts them from submitting swaps for central clearing. However, these participants may be surprised to learn that the additional burdens of noticing, documenting, and reporting, may make that decision more burdensome than beneficial.

For instance, if a swap participant seeks an exception, it must first file a notice with the CFTC, and additionally provide proof that it is using the noted type of swap to hedge or mitigate qualified commercial risk. The exception-seeking swap participant must then notify the Commission of how it generally meets its financial obligations associated with the swap. And finally, there are ongoing reporting burdens that require an excepted entity to report to the Commission or to a data repository, on a swap-by-swap basis, or annually for reduced activity. If the exception is invoked, each exempted entity is held responsible to hold itself open to the CFTC for any additional information that is required. This information may include trade capture details, position valuation, risk modeling, settlement, or other relevant trade-related data that must be adequately maintained.

Notwithstanding the inherent credit and operational risks that exist in all bilateral non-cleared swaps, resource considerations are necessary prior to seeking approval for a clearing exemption.

The practical implication makes the invocation of an exemption even more uncertain. That is, although the margin rules are not yet finalized, and the proposed rules do not impose margin requirements onto non-financial swap participants, there is a conflicting requirement that certain swap participants must have credit support arrangements in place to govern the rights and obligations of the parties, including margin. And these swap participants have a heightened responsibility to manage their swaps activities.

Logically, these entities are likely the counterparties of those seeking an end-user exception. However, these entities have an independent duty, separate and apart from any exception consideration, to model and manage all swaps. The heightened compliance requirements will likely pass to those swaps entities that seek to qualify for an end-user clearing exception.

One must consider that once these costs, including trade life cycle technologies, are passed on to the exception-seeking swap participant, together with the additional burdens of noticing, documenting, and reporting, is the end-user exception really worth the trouble?

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executive vice president, post-trade derivatives, SunGard's capital markets business

THE FUTURE OF POST-TRADE DERIVATIVES PROCESSING

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This blog post originally appeared on FTF News.

In the derivatives industry, significant, year-over-year transaction volume growth has become the norm. With high-frequency trading driving up the volumes of trades to hundreds of thousands or even millions per day, derivatives market participants must be able to manage these higher volumes. Moreover, due to market volatility, the peaks in volume must be managed within shorter time intervals, and this is driving the need for scalability.

A key factor to meeting the challenge is the ability to reduce the length of end-of-day processing and complete tasks more quickly. However, increased volumes can present difficulties for the monolithic back-office systems that firms have invested in and tailored to their business over many years. These systems must be enhanced to scale and perform optimally in an unpredictable and high volume trading environment. But enhancing the scalability of an entire back-office system in order to manage one specific task ramps up the cost of hardware, software and staffing.

So what is the recommended approach?

Component-based processing can help to address these challenges by focusing on improving scalability only for targeted functions or specific tasks. This technology approach means that firms are enabled to manage high volumes while continuing to leverage their current back-office systems without increasing their total cost of ownership (TCO).

This approach helps to increase flexibility by extracting system functionalities to optimize back-office processes. It also helps firms to improve the scheduling of these tasks. This is especially useful for time zone processing and scaling to new business requirements.

For example, let’s imagine that a large global clearing firm wants to ensure its processing in Asia, Europe and the U.S. is successful according to the requirements of each regional timeframe. A component-based approach gives the firm the ability to launch global end-of-day processing that covers all regions with the flexibility to run each one individually according to time zone.

Components also help to increase scalability while controlling TCO. Based on a firm’s specific requirements, they can make technology choices regarding which processes to externalize to improve processing. This eliminates the cost and pain of a switch-over to new platforms or the need for additional hardware.

With the right system strategies, the back office can provide better returns in the long run, especially given the explosion of information and trade volumes. Firms must take steps to strategically leverage technology to be more agile and efficient while still properly managing operational risk. The future of post-trade derivatives processing is here.

 

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deputy head of strategy, SunGard’s capital markets business

Q&A: TRANSFORMING POST-TRADE PROCESSING

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I recently participated in another Twitterview with DerivSource, who asked me several questions about transformations happening in the post-trade processing space. Within the context of regulatory reform, firms are recognizing the need to make changes to meet new rules, both those that have been identified and those still to be determined.

In the Q&A, we talked about data management, collateral management, approaches to regulatory compliance, and more. One of the most important ideas that came across is the concern that firms may be planning to respond to regulations one by one rather than equipping themselves with the ability to address multiple regulations in a flexible way.

If you missed the Twitterview, you can see the full back-and-forth with DerivSource here or you can search the #PTderiv hashtag on Twitter to find the full Q&A and add your own comments to the conversation.

TWITTERVIEW: TRANSFORMING POST-TRADE PROCESSING

DERIVSOURCE: With regulatory reform still in flux, how can firms start transforming post-trade processes to participate in the new OTC space? #PTderiv

TONY SCIANNA: Firms should take long-term view of regulatory reqs & impact on middle & back office, not just one-off challenges… Invest in #posttrade processes based on the big picture of increasing transparency & reducing systemic risk #PTderiv

DERIVSOURCE: What is the one post-trade ops area firms can start making changes to now to meet new regulatory rules and why? #PTderiv

TONY SCIANNA: No surprises from me: improving #datamanagement is the key to supporting regulatory demands. #PTderiv

DERIVSOURCE: What post-trade ops function faces the most significant transformation and why? #PTderiv

TONY SCIANNA: Hard to pick just one – data mgmt, #collateralmanagement, credit / risk mgmt, connectivity… New market structures, regulations, clearing of OTC #derivatives, etc. all require new approaches to #posttrade #PTderiv

DERIVSOURCE: Focusing on some specific post-trade processes, how can firms improve data mgmt in light of reg reform & new market structures? #PTderiv

TONY SCIANNA: Firms should be investing in capturing real time transactions across their disparate enterprise, standardize the data & … ensure the data can be readily accessible 24/7 for management reporting & any future regulatory demands #PTderiv

DERIVSOURCE: What about connectivity to new market structures like #SEFs #OTFs #SDRs & #CCPs? How can firms cope w/ connectivity complexity? #PTderiv

TONY SCIANNA: Ability to connect to new market structures, like data capture, must be flexible so firms can adapt to new requirements #PTderiv

DERIVSOURCE: Can firms process clearable #swaps and bilateral #derivatives in tandem efficiently? What are the challenges? #PTderiv

TONY SCIANNA: This is a challenge for back office ops. Firms will likely keep bilateral contracts & clearable swaps on separate apps… And all these applications will need added functionality for execution, matching &reporting #PTderiv

DERIVSOURCE: Collateral mgmt will transform in the new OTC #posttrade space. What is your customers’ biggest concern re: collateral mgmt? #PTderiv

TONY SCIANNA: A big focus on enterprise-wide collateral management &optimization will be crucial for market participants going forward… Firms will need a solution that allows them to select most efficient type of collateral to meet its collateral obligations #PTderiv

DERIVSOURCE: How can the CCPs help firms manage collateral when clearing various products across multiple jurisdictions? #PTderiv

TONY SCIANNA: The market requires additional clarification on what type of collateral will be eligible for use… by various CCPs before optimization strategies can be firmly established #PTderiv

DERIVSOURCE: Are you concerned about a ‘rush’ for technology from firms waiting for regulatory clarification before preparing post-trade ops? #PTderiv

TONY SCIANNA: Concerned about firms trying to respond to regulatory change 1 requirement at a time instead of preparing for the big picture… Firms must try to prepare for not just 1 rule but for ability to address multiple rules that will be introduced over time …#PTderiv

DERIVSOURCE: What is the biggest opportunity for the post-trade space in light of the regulatory change? #PTderiv

TONY SCIANNA: Reporting on transactions will be a necessity not just for bilateral contracts & clearable swaps but for all asset classes…#PTderiv

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deputy head of strategy, SunGard’s capital markets business

A SHIFTING FOCUS FOR OTC DERIVATIVES

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This blog post originally appeared on FTF News.

In recent years, we have seen many developments in getting the industry to light speed in the front office, but now the focus appears to be shifting to real-time data management and post-trade processing applications, especially in the OTC derivatives space. As the CCP landscape continues to evolve in the midst of unprecedented regulatory reform around the globe, firms now face the daunting task of adapting their post-trade processes to meet their current requirements and to prepare for the future.

While finalizing new rules for regulatory reform may be taking longer than anticipated, the impact of these changes is already being felt everywhere, from the movement of OTC derivatives transactions to central clearing to the myriad new reporting requirements that have begun to crop up globally. Even though we don’t know what the exact rules will be, firms participating in the OTC derivatives markets do know the general reasons behind the rules – increasing transparency and reducing systemic risk. And achieving this requires a focus on and investment in the back office.

At this point, firms have a choice: deal with the one-off regulatory requirements as they are announced or equip themselves with an enterprise-wide approach to tackling current and future rules. Of course, the choice should be clear; investing in flexible, enterprise-wide back-office capabilities today will allow firms to better adapt to any new regulatory demands on the horizon.

As firms consider this, they must determine how they will actually capture data from disparate applications, cross-reference and standardize that data, and then store it in an environment that is available on demand 24 hours a day, seven days a week. When it comes to post-trade processes, firms should ask: how can we report on any or all transactions globally across the enterprise in as close to real time as possible? Answering this question is the root to dealing with any new requests from a regulator, auditor, CEO or risk manager.

With many more changes to face in the months and years to come, this will allow firms to meet whatever new challenges the industry requires.

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deputy head of strategy, SunGard’s capital markets business

IS SETTLEMENT UNSETTLING?

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Have settlement fails become unsettling?

In a time when industry participants are grappling with numerous daunting challenges spanning financial regulation, cost control, and operational efficiency, settlement fails have suddenly become a newsworthy concern. Why? On February 1, 2012, the Treasury Market Practice Group (TMPG) expanded penalties to cover mortgages and agency debt fails.

The TMPG settlement fail recommendations aim to incentivize sellers to deliver securities on time to avoid creating market inefficiencies and increasing systemic risk. With each settlement fail, the financial system pays the price of heightened systemic risk; now those failing parties will pay the price with a new set of fees.  How should firms respond?

Let’s step back for a minute. We all know the importance of capturing transaction data in as close to real time as possible and being able to report on and analyze it whenever it is required. Having the same ability to manage all trade fails in a single environment should also be on a list of requirements. This will allow firms to understand their exposures to any given counterparty and to monitor and respond to any type of fail situation. Taking an enterprise-wide approach to capturing, standardizing and accessing fail data can help firms to increase transparency and reduce operational risk.

The new TMPG guidelines seem to require this type of strategy. Firms that can proactively capture, standardize and access their data in order to identify settlement fails can best position themselves to reduce their number of fails and avoid paying new TMPG fees. Being able to quickly pinpoint fail trends and control risk across the firm can help make the new settlement fail fee recommendations a bit less unsettling.

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deputy head of strategy, SunGard’s capital markets business

TRENDS IN OTC DERIVATIVES: TWITTERVIEW WITH DERIVSOURCE, TABB GROUP AND SUNGARD

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With trends in OTC derivatives in mind, we recently held a Twitterview with DerivSource and Kevin McPartland of TABB Group to delve into the topic a bit more. We discussed the rising cost of participation in the OTC space, the data management imperative, and balancing IT budgets given the continued uncertainty around new rules.

I’ve included the full panel-style Twitter discussion below. If you have your own questions, leave a comment or send a tweet to me, Kevin McPartland or DerivSource.

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DERIVSOURCE:
Cost of participation in OTC markets will rise; how will firms evaluate if they should exit this space due to higher cost? #TENfs

KMCPARTLAND: For most it’s simple ROI analysis – will upfront costs yield substantial profits? For others it’s cost of staying in the game at all #TENfs

TONYSCIANNA: Firms will need to do cost & risk analysis to determine whether or not it’s still cost-effective to be in markets they’re in #TENfs

DERIVSOURCE:
With electronic trading landscape still in flux, what challenges does industry face to reduce costs and improve returns? #TENfs

KMCPARTLAND: Many on the buy side will rely on their brokers to do the legwork –technology, compliance, etc. … For the dealers, it’s about designing the right business model based on what we know now #TENfs

TONYSCIANNA: It’s about creating transparency and liquidity. If you can get these things right, you will automatically reduce costs #TENfs

DERIVSOURCE:
How will firms cope w/ margin & liquidity squeeze clearing will introduce? What should firms change now to prepare? #TENfs

KMCPARTLAND: Margin financing, collateral optimization and other similar services are in high demand, and their use will grow. This will help reduce buy-side margin needs and help dealers make money around clearing #TENfs

TONYSCIANNA: Firms should work on collateral optimization for clearinghouses with major banks to provide their clients with optimized CM #TENfs

DERIVSOURCE:
Why should firms focus on enterprise data management now? How can firms improve agg of data across silos in cost efficient way? #TENfs

TONYSCIANNA: It’s a must. Firms will need to capture, standardize & have access to data across enterprise in real time http://ow.ly/6wt4q #TENfs

KMCPARTLAND: @tabbgroup sees transaction volume could grow 20 fold – related data even more. Waiting to deal with this is not an option #TENfs

DERIVSOURCE:
How will firms balance tight IT budget w/ onslaught of new reg requirements & uncertain timeframe for implementation? #TENfs

TONYSCIANNA: A lot of firms will seek point solutions as reqs are issued. We see larger firms taking a more enterprise-wide approach #TENfs

KMCPARTLAND: Some firms are deciding not to offer client clearing. The payback was not seen as justifying the cost… Others in the 2nd tier will take a wait-and-see approach to limit unnecessary work #TENfs

DERIVSOURCE:
Is there a silver lining to the transformation taking place in the OTC space for firms & the industry at large? #TENfs

KMCPARTLAND: OTC #derivatives reform will ultimately be good for the industry. The rules overreach in some parts, but … more automation and open access will ultimately improve liquidity and pricing #TENfs

TONYSCIANNA: Clearly the intent of transparency & reduction of systemic risk will benefit the industry, though will take awhile to get there… Industry coming together to create standards & reduce systemic risk is ultimately a good thing #TENfs

global head of strategy, SunGard's capital markets business

10 TRENDS IN OTC DERIVATIVES

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It is clear that regulatory changes are transforming the OTC derivatives space, from execution to settlement. There are many challenges at play here. As we head into 2012, market participants will need to manage large volumes of data in order to clear and process trades, and we will see new pressures on the cost and the more effective use of capital. In response to this industry transformation, my team and I have identified 10 key trends shaping OTC derivatives today.

I have posted the full list below. How is your firm approaching these 10 trends in OTC derivatives?

  1. Regulations such as Basel III, Dodd-Frank, EMIR and MiFID II are spurring financial services firms to improve their return on capital rather than simply focus on top line revenues.
  2. Shrinking profit margins may drive existing players to exit certain asset classes, such as structured equity, rates or credit markets.
  3. Competition will increase as greater transparency into OTC derivatives pricing and lower barriers to entry attract new players to the market.
  4. Firms will leverage new electronic trading capabilities for OTC derivatives to help reduce running costs and improve returns, particularly in their flow trading and market-making businesses.
  5. The cost of participating in OTC derivatives trading will rise, with the introduction of central counterparties altering the risk profile and margin requirements of OTC derivatives portfolios.
  6. Clearinghouses and market participants will require a consolidated view of collateral assets and margin movements to manage new pressures on margin and liquidity as well as new regulatory requirements for collateral.
  7. The need to optimize collateral and leverage every margin offset opportunity will become more pressing as the new capital charges take hold.
  8. Real-time risk analytics will become a necessity, with market best practice moving towards the incorporation of Credit Value Adjustment on a pre-deal basis.
  9. Firms will need to aggregate data from across asset classes and business silos as regulatory agencies shift the burden of reporting position limits and large trades from exchanges or clearing houses to firms.
  10. Firms will demand agility and adaptability from their technology given the uncertainty about the exact details and timelines for the new rules.