OTC Reforms Raise Technology Hurdles

Terry Flanagan

Firms face aggressive timetable in implementing system changes.

Financial institutions face hard choices in implementing system changes to accommodate OTC reforms in Canada.

Canada is embarking on meeting its G20 commitment to have derivatives reforms in place by the end of 2012, with a flurry of consultation papers due out in January and February, covering the gamut of OTC reforms.

“The timelines are aggressive and are forcing decisions at the industry elfin that are as significant as have been faced with any large-scale project,” said Andrew Karsgaard, vice president of quantitative execution services at BMO Capital Markets.

The Canadian Securities Administrators (CSA) has released a timetable of public consultations related to derivatives reforms, which calls for six publications over the next three months, to go along with the two that were published in 2011.

During 2012, regulators have published or plan to publish consultations on segregation and portability of derivatives (91-404), central counterparty clearing (91-405), registration (91-406), exemptions (91-407), exchange and platform trading (91-408), and capital and collateral (91-409).

In 2011, consultation papers were put out for comment on trade repositories (91-402), and surveillance and enforcement (91-403).

In 2010, the CSA issued its consultation paper on proposed OTC derivatives regulation (91-401), which laid out the overall roadmap of derivatives reforms.

The consultation paper enumerated specific objectives, including mandatory reporting of all derivatives trades by Canadian counterparties to a trade repository.

“Considering the timetable and scale of the effort required, firms will need to buy as opposed to build the technology,” said Karsgaard. “Fortunately, there are companies that can supply that trade repository technology to the Canadian marketplace.”

Canadian regulators are steering a middle course with respect to OTC reforms. While they are mindful of similar reforms taking place in other jurisdictions, notably the U.S. and Europe, they don’t want to either parrot those approaches or veer too far away from the mainstream.

“Global asset managers are mindful of the divergence that’s cropped up between U.S. and European jurisdictions, while OTC reforms are still at the consultation stage in Canada,” said Sean Hennigar, capital markets practice lead at SWI, a software consultancy.

Among the more challenging technical issues is devising a common messaging format for OTC derivatives, analogous to FIX for equities transactions and FpML for listed derivatives.

“A lot of OTC products aren’t standardized, and don’t lend themselves easily to structured message format like FIX,” Hennigar said. “Other XML-based are more configurable and self-describing.”

Firms are extending their middleware—the software that glues applications together—to deal with complexities of cross-border, multi-counterparty transactional products.

Rapid Addition, a provider of FIX and FAST related software solutions, offers its RA-ShortCut line of adapters that plug into Microsoft’s BizTalk middleware platform.

The RA-ShortCut adapters perform simple transformation and normalization between multiple protocols, including FIX, EMX, SWIFT, FpML, and others.

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