Dodd-Frank Requires Enterprise OTC View

Terry Flanagan

The Dodd-Frank Act will require market participants to implement technology to view their OTC derivatives holdings.

Buy-side firms will have to be able to record all data points on how an instrument is traded to be able to support an enterprise-view of the OTC derivatives portfolio.

“Some of the stipulations of Dodd-Frank, such as the CFTC’s proposal for unique product and counterparty identifiers, demands an accurate, granular, consistent and transparent representation of security master, trade and positional data,” Ebbe Kjaersbo, chief business consultant at SimCorp North America, told Markets Media.

Responses to a poll of buyside firms conducted by SimCorp revealed a predominant lack of preparedness for Dodd-Frank’s central trading and clearing requirements for OTC derivatives.

The survey, which polled over 120 executives from 60 buyside firms in North America, showed that 72 percent of firms consider Dodd-Frank to be a top priority for their firm. When asked about system support, 77 percent of firms stated that they either do not have or were not sure that they have the right systems in place to support compliance with Dodd-Frank’s OTC derivatives central trading and clearing requirements. Only 23 percent of firms are confident that they are prepared for Dodd-Frank’s OTC derivatives requirements from a systems perspective.

Best practices for Dodd-Frank compliance should also be applied when introducing new products, entering new markets and assessing liquidity and exposure. “Risk management and performance management represent two-sides of the same coin,” said Kjaersbo.

The best practices created for Dodd-Frank can extend beyond compliance to support the systems required to drive investment performance.

“For example, one of the items on the checklist–comprehensive instrument coverage–is critical when introducing new products because the ability to model new instruments quickly reduces time-to-market for new financial instruments that may drive investment performance,” he said.

Another item on the system readiness checklist–enterprise data management–is critical when assessing liquidity and exposure because it gives the asset manager 360-degree visibility across all asset classes, holdings, positions, etc.

“With enterprise data management systems, all front-to-back office workflows are supported on one single platform ensuring the risk of poor data quality inherent in integrating silo systems is avoided,” said Kjaersbo.

Buy-side firms that have to consolidate data from disparate “silo” systems run the risk of having poor overall data quality or basing decisions on multiple versions of the truth. Poor data quality in turn can result in impaired or delayed investment decision making, breach of client guidelines, and settlement problems, including matching or settlement failure.

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