OTC Space Swamped by Transparency Regs
Documenting OTC derivatives transactions historically has involved mountains of paperwork, which now needs to be digitized in order to meet more stringent regulatory requirements for transparency.
“There are specific rules that firms need to follow now in terms of control, transparency and even efficiency for remediation of these documents that simply will be unworkable in paper form, and so it’s driving people towards electronic,” Lansing Gatrell, managing director and head of Counterparty Manager at Markit, told Markets Media.
Higher capital requirements are putting immense pressure on the cost base of banks at the same time they have revenue pressures so firms are looking across their operations at ways to streamline.
Markit and Thunderhead.com, which provides software for trade and relationship documentation, have announced a partnership to establish an online service for creating and negotiating master confirmation agreements (MCAs).
Markit will integrate Thunderhead.com’s ONE for Capital Markets, software as a service that automates the production, editing and execution of MCAs and other capital markets documentation, with Counterparty Manager, Markit’s document management platform for trading account onboarding, reference data management, regulatory compliance and other reporting.
Counterparty Manager allows asset managers and dealers to interact and share information. Companies have traditionally shared “static” documents and regulatory attestations that they needed to comply with various regulations, such as Emir and Dodd-Frank, or -anti-money laundering rules.
The generation and negotiation of such static documents needs to be turned into a dynamic process. “We’ve been getting constant feedback from our customers as to how we can streamline that process and provide transparency, the same way we’ve provided transparency into the sharing of the finished product,” said Gatrell. “So we began looking for ways to implement that kind of functionality in our platform and that’s how we came across Thunderhead.”
“This particular service will be looking at keeping the documentation electronically throughout the negotiation so there won’t be any paper associated,” said Robin Moody, global head of capital markets at Thunderhead.com.
A recent pilot program with 11 of the largest global derivative trading firms from the buy and sell sides demonstrated that negotiating and executing MCAs took 30% less time electronically than in paper form, the companies said in a release.
One of the goals of the partnership is to migrate the creation and negotiation of contracts to electronic form. “The master confirmation agreement is the first document but there will be other documents that we would like to roll out as well as a result of this partnership,” Gatrell said, mentioning credit support annexes and investment management agreements in particular. “The challenge with having all of this documentation is that you can’t extract data from it easily. So firms are definitely looking to digitize existing documents as well as new documents.”
Regulations such as Dodd-Frank and Emir require firms to demonstrate control over legal documentation. In addition, the Basel Committee on Banking Supervision and the International Organization of Securities Commissions have established a December 2015 deadline for national regulators to come up with rules that conform to guidelines issued by BCBS/Iosco for calculation of initial margin and variation margin.
“That’s a huge undertaking,” said Moody. “We’ve had examples from some of our tier one firms that have potentially hundreds of thousands of collateral documents that will have to be renegotiated. To do that manually is going to be very a labor-intensive and expensive process.”
Dodd-Frank and Emir both require that confirmations execution timeline for all five asset classes – credit, rates, FX, equities and commodities – move to T+1 for counterparties exceeding a clearing threshold and to T+2 for counterparties below the clearing threshold. The industry average is closer to T + 6 at for the current paper-based processes, said Moody.
President and chief executive officer of State Street Global Advisors will retire in 2022.
The majority of US ETF issuers are either developing or planning to develop transparent active ETFs.
BlackRock CEO says pandemic has turbocharged evolution in the operating environment for every company.
Total assets under management grew to more than $10 trillion in 2021.
The global alternative asset management firm listed on Nasdaq.