Derivatives Infrastructure Reaches Inflection Point

Terry Flanagan

The derivatives industry has achieved progress in automating many of the operations in OTC derivatives, such as trade data capture, confirmation and settlement procedures.

According to a survey released by the International Swaps and Derivatives Association (Isda), infrastructure improvements are reflected in the continuing decrease in outstanding confirmations.

Credit derivatives, for example, show an average across all respondents of 0.3 business days outstanding, compared with 0.4 business days in last year’s survey.

Equity derivative confirmations outstanding fell to 6.1 business days compared with 6.5 last year and interest rate derivatives confirmations also fell to 1.0 business days from 1.5 last year.

To put these numbers in perspective, confirmations outstanding in 2009 were 3.5 business days for credit derivatives, 9.7 business days for equity derivatives and 6.9 business days for interest rate derivatives.

Various proposed and final regulations have been implemented under the Dodd-Frank Act in the U.S. and Emir/MiFID/MiFIR in Europe which touch upon trade reporting, processing, execution, confirmation and settlement.

An overarching theme is the ‘futurization’ of the swaps market, by which formerly bilaterally executed and cleared OTC transactions are being moved to, and in some cases, replaced by, futures exchanges.

“There is little doubt that the Dodd-Frank Act and its related requirements impose a significant burden on swap market participants,” said Jeff Gooch, CEO of MarkitSERV, in a comment letter. “We believe that it may be the cumulative effect of the added regulatory burdens with respect to swaps that provide a strong incentive for market participants to use futures over swaps.”

MarkitSERV is a provider of confirmation, connectivity, and reporting services to the OTC derivatives markets. In 2012, it processed over 20 million derivatives transaction events globally.

It provides trade processing, confirmation, matching and reconciliation services for various OTC asset classes, as well as middleware connectivity to downstream processes such as clearing and reporting.

Markit earlier this month announced that it had acquired the ownership stake in MarkitSERV held by the Depository Trust and Clearing Corporation (DTCC). Markit and DTCC founded MarkitSERV in 2009 as a joint venture that combined the firms’ electronic trade processing services for OTC derivatives.

Seventy-seven member firms participated in the Isda survey, which covers five OTC derivative product groups: interest rate derivatives, credit derivatives, equity derivatives, currency options and commodity derivatives.

The survey shows the results of industry investment in infrastructure over the past several years. The confirmation process for credit derivatives has been completely automated and for the second year, 100 percent of eligible trades are confirmed electronically. 92 percent of eligible interest rate derivatives are confirmed electronically compared with 88 percent last year.

“Over the years, Isda has served as the driver of, and architect for a secure and efficient infrastructure that supports an orderly and reliable OTC derivatives marketplace, as well as transparency to regulators,” said Robert Pickel, Isda’s CEO, in a statement. “The survey illustrates the continued dedication of Isda and the industry to the development of a robust operational infrastructure that achieves the goals of regulatory reform and can react and adapt to the challenges ahead.”

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