Post-Trade Systems Stressed by Volumes
Infrastructures are retrofitted to meet OTC requirements.
Regulatory reforms will impact the demand for post-trade services for exchange-traded derivatives in a major way due to transaction volumes.
“With the expected reforms, much of what are currently considered OTC instruments will move on to exchanges, either to be traded across their entirety or to be executed,” David Penney, executive vice president of product management and development at SmartStream, told Markets Media.
“The currently infrastructures at many firms will have to evolve to meet the expected volume increase as it will be an impossible task with the current paper-based and manual processes,” he said.
Many of those processes can be automated already, reducing the risk of mismatches and delivering higher straight-through processing rates.
“Crucially, automation also provides one of the key aspects that regulators are demanding from derivatives reform– increased transparency and improved reporting in shortened timescales,” Penney said.
Exchange-traded derivatives represent a significant processing issue for the sell-side due to the number and type of data sources, including brokers, clearinghouses and exchanges that must be managed.
This has been compounded by rising volumes that are likely to increase as more transactions are executed through exchanges as a result of regulatory reform to the OTC markets.
The main challenge is to collate and manage all of the various feeds, from the exchanges a sell-side firm is a member of –for a large global firm this could be upwards of 30 or more–to the brokers they use and the data sources used to price the instrument, Penney said.
Many of these feeds come in a proprietary format and so require a significant amount of IT and resourcing to manage.
SmartStream’s latest reconciliation software , TLM Reconciliations-Premium, has at its core a powerful transaction matching ‘engine’ that enables firms to gain higher STP rates, said Penney.
“It highlights failing transactions and escalates those to users so that they can immediately see those transactions that represent the largest risk, investigate why they are failing, repair them and then return them to the transaction flow,” he said. “Ultimately this means a lower cost-per-transaction.”
SmartStream’s reconciliations platform “has a generic approach to data matching,” Penney said. “This means that it can, out-of-the-box, define the workflows required for a cash or securities or derivatives transaction. This ensures that installation projects are much faster, delivering a faster time to market for our clients.”
OSTTRA will provide post-trade solutions for the global OTC markets.
Phase five of the uncleared margin rules come into effect in September.
There is growing demand for more transparency into the credit default swaps market.
This will increase transparency in the OTC derivatives market.
Unique Product Identifier facilitates aggregation of OTC derivatives transactions globally.