Solutions: Post-Trade

deputy head of strategy, SunGard’s capital markets business

PRIORITIZING VALUATION AND SYSTEMIC RISK

Posted by

Author: Tony Scianna, executive vice president, SunGard’s brokerage & clearance business

Two commentaries on regulatory issues caught my eye while I was catching up on some reading recently.

The first was a column in Securities Industry News in which editor Tom Steinert-Threlkeld argues that firms must create solid processes and procedures for establishing the value of assets. I agree with this stance and believe we’re going to see more cases like Nomura International’s experience that he touches upon in the article. When it comes to prioritizing valuation, in 2010 I think we’ll see an emphasis on firms having to show real-time records of how they reached each valuation.

But how many firms are preparing to do that – and how many are able to do it now? For more on this topic, see this previous post regarding my thoughts on real-time records.

Meanwhile, I read that Andy Lo of MIT testified in front of the U.S. House Financial Services Committee about the related issue of systemic risk. You can find the full testimony on his Website, but I’d like to mention a few of his points.

First, he says the highest priority for regulatory reform should be establishing the means to objectively and quantitatively measure and monitor systemic risk on an ongoing basis. He believes this will involve providing transparency around assets, liabilities, collateral, liquidity, etc. (rather than position transparency) and says this information should already be available from existing enterprise risk management systems. Is it?

He also acknowledges the importance of the infrastructure that will collect, clean, analyze, organize and store this data. Can your technology perform these tasks for data?

Are you focusing on asset valuation or another issue related to systemic risk? And what lessons should we be learning from cases like that of Nomura International?

deputy head of strategy, SunGard’s capital markets business

REGULATORY REFORM AND MANAGING RISK

Posted by

Author: Tony Scianna, executive vice president, SunGard’s brokerage & clearance business

Financial regulation and risk were two of the biggest buzz words in the news over the past week. One blog post that I found particularly compelling came from the Waters Cooler Blog. Titled Making Risky Behavior Less Risky, it quotes comments that TowerGroup’s Stephen Bruel made on regulatory reform and managing risk. In case you haven’t seen it, I wanted to share a few excerpts that stood out:

“One of the problems that we saw [after the financial crisis] was that regulators weren’t talking to each other. One of my biggest surprises is that they haven’t created the Department of Homeland Security equivalent of regulation.”

“What this all means, essentially, is that data is king. Firms will have to develop processes to ensure that regulators have the necessary data to manage systemic risk. The ultimate goal is to present an aggregated risk profile using data that helps both the regulator and the institution.”

“Without that data, you can’t manage your risk. The goal [of the regulators] is to change behavior because if you don’t change behavior then the regulation is worthless.”

What’s your take on this article? With all the news and blog posts on these themes in the past week, what else has caught your attention? I’m interested in your thoughts.

Also, if you want some additional perspective from Stephen Bruel, please watch this brief video, where he speaks to SunGard about managing risk and increasing efficiency in the derivatives market.

deputy head of strategy, SunGard’s capital markets business

MANAGING RISK IN LISTED DERIVATIVES

Posted by

Author: Tony Scianna, executive vice president, SunGard’s brokerage & clearance business

As regulators move closer to drafting specific rules around the derivatives market, it is important to remember one of the key drivers behind regulatory interest: risk. As the failure of Lehman Brothers has shown us, risk can take many forms. You can find examples of operational, counterparty, market, and asset class specific risk, among others.

Of course, Lehman also taught us why firms need to understand their intraday risk – their risk as it changes throughout the day. Traditionally, it was fine to calculate risk on an end-of-day basis, or to respond to exceptions or problems on a T+1 basis. As discussed in my previous post, that’s no longer sufficient.

In the listed derivatives market, one type of risk which arises is from trades either claimed or unclaimed from give-in and give-out trades between firms. For example, if the recipient FCM fails, an executing broker giving trades out to that FCM may end up posting those positions to its own books. This results in potential risk when margin calls from the exchange and additional capital requirements are required to support those positions. Also mismanagement of allocations received could mean that individual customers going over their credit/position limit were allowed to continue trading even when existing controls should have stopped them.

This creates specific business problems for both the buy- and sell-side.

For example, the buy-side:

• Needs automated trade confirmation to reduce manual tasks
• Is looking for reduced costs and operational risks
• Needs the ability to interface with multiple clearing brokers through the same interface to reduce “clearer risk”
• Needs continuous, real-time connectivity to the market and back-office systems to better manage trading positions
• Needs the ability to handle settlement instructions in real-time
• Needs faster response time on confirmations

The sell-side needs to:

• Reduce unclaimed allocation risks (which could spell potentially huge losses if a firm goes out of business before it accepts a large trade)
• Reduce operational expenses with straight-through processing
• Be able to launch end-of-day processes earlier in the day, reducing overtime and operational risk
• Be able to bring on new client business more quickly and thereby increase its competitive offering to prospective buy-side customers
• Replace manual, balkanized and error-prone average pricing processes
• Increase the speed and accuracy of confirmations to customers
• Better manage cross-customer, cross-application codes and static data
• Better handle of T+n Kerb trading

Did I leave anything out? What would you add to these lists?

MEMORABLE QUOTES FROM FIA EXPO IN CHICAGO

Posted by

Author: Rich Hulit, executive vice president, SunGard’s brokerage & clearance business

On October 21, 2009, I attended a session at the FIA Expo in Chicago on the subject of upcoming regulatory changes and increased oversight and wanted to share some insight from the panelists.

I wanted to take a moment to share these conversation starters, and encourage you to post your own memorable moments in the comment section. Did you hear anything at the FIA Expo that really hit home?

Patrice Blank, CEO of NewEdge
He asked, “Would putting all CDS trading in one location have prevented what happened in 2008?” and worries “when moving OTC contracts onto a clearing house, we need to make sure that we are not increasing systemic risk.”

John Damgard, President of FIA
He asked the question, “If the U.S. is the only country to put in hard position limits, what will that mean as far as pushing business into other countries or off exchanges?”

Terrence Duffy, Chairman of CME Group -
He said that he “hopes Congress understands that we are a global business when deciding on regulatory changes.”

I look forward to reading your thoughts and seeing what types of topics and questions struck you at the FIA Expo this week. What was the best part of the event for you?

EXAMINING THE CCP MODEL FOR THE OTC DERIVATIVES MARKET

Posted by

Author: Gerry Murphy, former president, SunGard’s brokerage & clearance business

Over the past decade, the OTC derivatives market has grown dramatically. According to the Bank for International Settlements, the notional amount outstanding in the over-the-counter (OTC) derivatives market grew by 20.5% (compound annual growth rate) between 1998 and 2008. It far outpaced the listed market, which grew by 13.6% during the same 10 years.

With the events of the last 12 months, regulators have begun to scrutinize this market – in particular the credit default swaps market – in the hopes of increasing transparency and reducing counterparty risk. It’s not surprising that in the wake of this scrutiny, the central clearing counterparty (CCP) model has been suggested as a possible solution.

The traditional bi-lateral model may provide flexibility and creativity through custom contracts, as well as the potential for greater profits. However, central clearing can ease settlement, transfers and allocations, as well as protect the parties against default by their counterparty or a large section of the market.

While OTC volumes have shrunk, overall derivatives volumes remain strong, suggesting that the market is already shifting away from bi-lateral clearing toward the central clearing model. The organizations behind these clearinghouses are hoping to capitalize on this, as well as on the expected regulations, although the new rules are far from finalized.

Not everyone agrees that this model is the best way forward. A recent paper published by two academics from Stanford University argues that adding a central clearing counterparty for one class of derivatives, such as credit default swaps, can actually reduce netting efficiency and therefore lead to an increase in collateral demands and average exposure to counterparty default. Moreover, they maintain that whenever it is efficient to introduce a CCP, it cannot be efficient to introduce more than one CCP for the same class of derivatives.

As usual, the proof is in the market. Any CCP will only survive with the support of the buy and sell side, and that is by no means assured. The worst outcome would be a new system that is still risky but in a different way.

I’m interested in your perspective. Weigh in and have your say:

Do you agree with the Stanford University paper, or will the CCP model prove to be the right path toward transparency and reduced risk?

deputy head of strategy, SunGard’s capital markets business

YOU CAN’T WAIT UNTIL FRIDAY ANYMORE

Posted by

Author: Tony Scianna, executive vice president, SunGard’s brokerage & clearance business

Everyone is talking about the regulations that are being created in the wake of the financial meltdown. Of course, no one knows exactly what the regulations will mandate. As a result, it may seem as though it is impossible to prepare for these rules ahead of time. But it is also a mistake to do nothing.

Whatever the details of the new regulations, it has become clear that the biggest impact will be around the need for real-time information, whether that relates to counterparty exposure, margins, risk reports, or other areas. It is no longer sufficient to wait until tomorrow or next week or even end of day to calculate your margins or determine your positions.

So what can you do? Take an old-fashioned inventory. What systems are not real-time? What do you need to do to get your systems ready to feed downstream applications with real-time information – or to deliver information in real-time? Then develop a plan to get to that point.

And don’t assume that if you’re in one country then you don’t have to worry about the regulations elsewhere. If the painful experience of the past year has taught us anything, it’s that as different as the various economies around the world are, they are inextricably tied together. What’s happening in one country can affect everyone else.

Don’t waste time – start preparing now.

deputy head of strategy, SunGard’s capital markets business

DATA CHALLENGES: INTERVIEW WITH INSIDE REFERENCE DATA

Posted by

Author: Tony Scianna, executive vice president, SunGard’s brokerage & clearance business

Earlier today I had the pleasure of speaking with Inside Reference Data via a Twitter interview session.  The questions focused around data and some of the challenges firms are facing and What Happens Next in reference data.  The interview was grouped under the #IRDSUNGARD hashtag, but I have the transcript below for you to review.

Since we only had a short interview window, and only 140 characters to complete it, please post your full comments below, I would love to learn more about how you are approaching data challenges.

Here is the interview:

@ReferenceData: Thanks for your time today Tony

@tonyscianna: Thank you Carla, glad to be here

@ReferenceData: @tonyscianna What are the main reference data challenges the industry faces at the moment?

@tonyscianna: Leveraging data. Firms must leverage the value of the data while managing increasing volumes.

@ReferenceData: Are there any new requirements in there reference data space following the financial crisis?

@tonyscianna: A greater need for accurate, real-time data. Where is the data coming from? You need full transparency.

@ReferenceData: How do you think this space has changed in the last year?

@tonyscianna: I see more emphasis on risk mitigation, counterparty exposure, and the need for accurate valuations.

@ReferenceData: How is SunGard dealing with these data challenges?

@tonyscianna: Our Stream technology consolidates data for real-time view to help manage risk across client orgs. A client said…

@tonyscianna: Stream helps us manage risk because it’s real time, enables us to collect diff prods, bring them under 1 umbrella

@ReferenceData: How can effective data management and data integration facilitate risk evaluation?

@tonyscianna: Consolidated data can provide real-time, global, enterprise-wide view to manage risk and exposure

@ReferenceData: & how have your clients concerns/areas of focus changed in the past months?

@tonyscianna: The focus is on improving data quality and transparency, reducing risk and managing regulatory scrutiny

@ReferenceData: What are your main areas of focus at the moment?

@tonyscianna: On helping customers turn data into decisions, using real-time, holistic information from across their firm …

@ReferenceData: Where do you think the focus will be in 2010 and forward?

@tonyscianna: Continued focus on risk mitigation, regulatory changes and the need for real-time decision support

@ReferenceData:& what impact do you think increased regulatory scrutiny will have?

@tonyscianna: HUGE! It’s happening now. Firms will need timely data and holistic views to comply

@ReferenceData: Thank you very much Tony for participating in today’s Q&A

@tonyscianna: Thanks Carla. I talk more about these issues on our blog and in a video I recently recorded.

deputy head of strategy, SunGard’s capital markets business

OPTIONS SYMBOLOGY INITIATIVE: ARE YOU ON TRACK?

Posted by

Author: Tony Scianna, executive vice president, SunGard’s brokerage & clearance business

Industry testing for the Options Symbology Initiative is scheduled to begin in just three months, and the deadline for full readiness is only eight months away. Are you ready?

Are you sure?

The initiative sounds straightforward – US listed options will transition from the current OPRA codes and fractional strike price values to a 21-character key. But it actually affects many more systems and relationships than originally assumed. In fact, many firms are only realizing now just how much time, effort and – yes – money is required to ensure full readiness.

The tangle of internal systems and teams, vendors and service providers has increased the workload and led to major adjustments to budgets, staff and timelines. Moreover, many plans only included the areas covered by industry testing. Yet much broader internal integration and regression testing is needed for full OSI readiness.

What best practices might help you prepare?

  1. Inventory and prioritize all of your systems – don’t restrict your focus to options systems. Many peripheral systems also need to be regression tested or tested for errors made in the process of remediating systems.
  2. Think about initiating separate program management oversight for OSI testing. The process is so complex that it may very well require it.
  3. Involve your vendors and other service providers in the testing process for proper coordination and better communication.
  4. Consider automated testing frameworks, which can help with unit and functional regression testing through to recreating your entire environment in a test environment – and then running business processes that match your own processes. Automation can speed the testing process and help reduce errors created by manual intervention.
  5. Look at whether you need outside help. Executing the OSI remediation program in-house can be difficult, since a focus on other business priorities and internal operations and technology issues can reduce the resources that can be dedicated to the OSI impact analysis and remediation effort. More and more firms are seeking SunGard’s help and expertise to assist their own subject matter experts.

If you’d like to know more about this issue or our services, please visit our OSI Website.

deputy head of strategy, SunGard’s capital markets business

THREE POST-TRADE AREAS TO WATCH

Posted by

Author: Tony Scianna, executive vice president, SunGard’s brokerage & clearance business

As everyone acknowledges, the once familiar landscape of financial services is rapidly changing. Keeping track of these changes can be overwhelming, but within the post-trade solutions area, I think there are three key areas to watch.

The first is regulatory oversight. With global governments and their taxpayer funds helping to stem the global financial crisis, governments and regulators will demand increased, faster and more reliable oversight and accountability. With the greater focus on over-the-counter transactions, for example, monthly and weekly capital calculations are clearly insufficient. So, what’s the answer?

The second area to watch is counterparty and asset exposure. Firms must be able to look across multiple applications and disparate technologies to determine what their exposure is to or with any given client or counterparty. Moreover, they need this information in real-time. That is a major challenge for most firms.

It is equally important to be able to assess exposure and risk to a given asset, underlying industry, company or institution or even country. Can you look across multiple asset-specific applications and present a holistic view of your complete exposure to a particular asset class, industry, company or country?

Finally, current market conditions are changing the way that broker dealers and hedge funds are looking at the traditional clearing model. Hedge funds are “de-leveraging” – returning to the onshore world to reduce their leveraged amount as well as their exposure to foreign governments’ bankruptcy and protection laws.

With this comes a concern about leaving all of their assets at a single bank, broker-dealer or prime broker. Many are opting to utilize multiple prime brokers, and the larger ones may chose to become self-clearing broker-dealers in order to control their own destiny.

Broker-dealers are seeing the same types of issues. The ones with a large enough capital structure are rethinking the correspondent clearing model and are also looking at becoming self-clearing broker-dealers. They can take over the controls and reduce their exposure to their clearing broker-dealer’s balance sheets, decisions and exposure.

Of course, the challenges may be easy to identify, but the solutions are not. What are some of your concerns and ideas about the changing financial landscape?  Share your perspectives below or discuss your insights with industry peers at SunGard City Days.

ADJUSTING YOUR TECHNOLOGY AND BUSINESS STRATEGIES

Posted by

Author: Gerry Murphy, former president, SunGard’s brokerage & clearance business

Everyone talks about market volatility, more stringent regulation and the global management of credit. But even as these new challenges reshape this industry, financial services firms continue to face familiar issues, too: the pressure to reduce costs, demanding clients, industry consolidation, and increased growth in trading, particularly in the global futures and options market.

Have firms adjusted their technology and business strategies to reflect this new environment?

Many of them have. But many others still rely on regional services and multiple applications, while departments are divided into silos. This leads to duplicated efforts in many areas, from managing collateral to opening accounts. Reducing that inefficiency is key to cutting costs but also to responding to these new challenges. For instance, enterprise-wide platforms and services can help firms create a consolidated view across their organization so that they can manage and mitigate risk globally.

Clearly, every financial institution must be able to manage and identify their overall risk or exposure to a given customer or counter party.  More and more OTC products are trying to find a way into the listed space to reduce that very risk and exposure. And more discussions over the various CCPs globally are popping up.

Firms can no longer rely on the old models and old assumptions. What made sense 18 months ago is not necessarily best practice now. Organizations are searching for the right strategy and for the next business model. The series of events that we are holding this year around the world, SunGard’s City Days, is a great opportunity for this type of conversation.

How are you keeping up with the evolution of the industry? What do you need to change and what will help you succeed in this turbulent, yet familiar, market?