By Terry Flanagan

Buy Side Ups Ante on Trading Systems

As OTC swaps shifts to swap execution facilities and MTFs, buy side traders are requiring the same workflow functionality that they’ve come to expect in equities and futures trading systems.

“Now they have margin requirements, they have to bring order flow together, and be more efficient in using capital, and as a consequence they are asking Fidessa to leverage our OMS,” said Justin Llewellyn-Jones, chief operating officer and global head of derivatives at Fidessa. “So all the tools we have in the equities space, we are reapplying into derivatives. It’s not a direct correlation, it’s conceptual and you have to rebuild it, but things like global order management is resonating tremendously, since they’ve never had to do that before.”

Coinciding with the global hedge fund boom from 2003 to 2007, investment firms using derivatives instruments began demanding a new breed of solution, according to an Aite Group report.

“Requirements included support for advanced risk analytics and valuation modeling, and a small cadre of solution providers surfaced from other segments of the financial services markets to meet the challenge, making great headway in widening the scope of solution functionality,” said Aite Group analyst Denise Valentine.

Clarus Financial Technology has launched its CHARM product, for pre-execution or pre-clearing acceptance checks of interest rate derivative trades.

CFTC Regulation 1.73 states that clearing FCMs accepting orders for automated execution on a SEF, need to use automated means to screen orders for compliance with risk-based limits. CFTC Regulation 1.74 establishes STP requirements for FCMs, SEFs and DCOs and notes that a near-instantaneous acceptance or rejection of each trade provides certainty of execution and clearing, reduces costs and decreases risk.

“The requirement for near-instantaneous acceptance or rejection, is resulting in FCMs believing that this is only possible by pushing daily DV01 risk-limits to hubs and SEFs,”. “However this is an in-efficient use of margin as it fails the simple test of margin benefit for a risk reducing trade. It also means an FCM is outsourcing its intra-day risk management to an external infrastructure, which for many firms is not a desirable outcome.”

While SEFs and hubs are offering to forward “ping” requests to FCMs, this requires FCMs to provide the complex compute intensive part of the process before responding with an accept or reject.

“By announcing the capability to perform a 10 millisecond check for the pre-trade incremental impact on an account’s initial margin and doing so on commodity hardware, we are making a “ping” response a truly viable model for any FCM,” said Amir Khwaja, CEO of Clarus Financial Technology.

“In an environment where collateral for margin is scarce and becoming more expensive as interest rates rise, those FCMs that offer their clients the best intra-day utilization of margin are going to have an advantage in the battle for market share,” Khwaja said.

The overall global portfolio management and accounting systems market represents about $3.3 billion in spend. For OTC derivative-intensive portfolio systems serving the buy-side by supporting core infrastructure, the global market size is $1.28 billion in 2013, and Aite Group expects this market to grow to $1.41 billion by 2017 at an annual average growth rate of 2.5%. This forecast includes suite providers with advanced risk and valuation modeling as well as stand-alone accounting portfolio systems with specialist support for OTCD.

Vendors continue to enhance systems, focusing on collateral management improvements, dynamic dashboards as work-flow tools, connectivity associated with new regulation, and improved solution speed.
“The broader use of derivatives, the increasing regulatory requirements for reporting on those instruments, and the generally complex investment environment—one requiring ever more analytic rigor—keeps this technology category busy.,” Valentine said. “There’s no going back.”

Related articles

  1. Algorithms have become more prevalent in the spot FX market.

  2. Congress Unlikely to Act on HFT

    QB’s Algo Suite for futures market trade execution is also being co-located to HKEX.

  3. Breaking data silos is key to deploying automation beyond 'nuisance' orders.

  4. They can be used on quantum hardware expected to be available in 5 to 10 years.

  5. Regulation and Liquidity Top Concerns in Fixed income

    Streaming blocks change the basis of matching and price discovery so institutions can find new liquidity.