The FT did a great job covering TABB Group’s new research piece looking at the technology challenges facing clearinghouses and dealers as they prepare for central clearing mandates. Read the full story here.
And the press release:
TABB Says Dealers and Clearinghouses Need to Make Huge Investments and Upgrades to Current Clearing Technology
NEW YORK & LONDON, Sep 29, 2011 (BUSINESS WIRE) — Global regulators focusing on the clearing of OTC derivatives have started a technology revolution, says TABB Group in new research published today, “OTC Derivatives Clearing Technology: Bringing the Back Office to the Forefront.”
“OTC derivatives reforms are causing headaches all over Wall Street, the City and beyond,” say Kevin McPartland, a TABB principal, director of fixed income research and co-author with senior contributing analyst Finn Christensen. “Unfortunately, current clearing infrastructures are neither scalable nor flexible enough to handle the changes ahead, a fact driving a wholesale change from overnight (or longer) processing to near real-time clearing expected to occur during the next three to five years.”
Anticipating an increase in transaction volumes is a key component to the clearing technology roadmap, and using listed-derivatives markets as a guide, TABB estimates that as new trading and clearing mandates are implemented, transaction volumes could increase twentyfold with market data volumes rising three to four times above current levels. “Not only must clearing infrastructures be scaled up but upgraded in such a way that they can scale further if transactional growth exceeds current estimates,” McPartland says.
Despite the fully staffed IT teams and eight-figure budgets at big global dealers and some clearinghouses, the authors explain, building out this infrastructure will be difficult without third-party assistance. “Technology providers have already stepped in to revamp legacy systems and build new technology that solves many of the issues born from expected regulations. The biggest market participants will take a best-of-breed approach, utilizing the best off-the-shelf products they can buy and tightly integrating them with systems that are built by in-house staff.” They add that most buy-side firms expect swaps dealers and their service providers to provide the necessary connectivity and interfaces.
Real-time clearing of a broad range of OTC products will happen, McPartland says, as market participants and regulators demand it and innovative technologists guarantee it. “These improvements will come in phases, paralleling regulatory rollout and growth in clearing volumes. The first phases are underway and clearinghouses and dealers understand the winners will be those who can consume and disseminate data elements critical to trading, clearing and reporting in the least amount of time. But technology is the key catalyst behind the elimination of existing inefficiencies, reduction of expensive manual resources and lowering of operational risk.”
Based on conversations with clearinghouses, swap dealers, technology providers and buy-side clearing specialists, the 21-page TABB report with 8 exhibits examines the impact new OTC derivative regulations will have on clearing technology for both sell side firms and clearinghouses; the cost of implementing the technology needed to handle real-time clearing and intra-day margin calls; and a view of the new clearing workflow.
The report is available for download by TABB Group Research Alliance Derivatives clients and pre-qualified media at https://www.tabbgroup.com/Login.aspx . For an executive summary or to purchase the report, visit http://www.tabbgroup.com or write to firstname.lastname@example.org.
Swap clearing is not just for the big banks. State Street’s announcement is further proof of that. With (lots of) money and a high credit rating, client clearing could be a good business for you. My upcoming research study, for which I spoke with two dozen swaps dealers, will provide more detail into how these non-G14 banks will compete in the new swaps world. In the mean time, expect more similar press releases over the coming months.
Kevin McPartland, head of fixed-income research at Tabb Group, a consultancy, said: “The custodian banks see clearing as a huge opportunity because they are very well capitalised and have high credit ratings and are very focused on a post trade processing already. So it makes a lot of sense that they would step in as a clearing broker.”
TABB Group recently conducted a poll of swap market participants regarding varies issues surrounding the creation of swap execution facilities (SEF) and the proposed rules from the CFTC and SEC. This is the FT’s overview of our findings (which are currently available to clients and contributors here). The industry thinks SEFs will be good for the swaps market, but there are a lot of ifs, ands and buts.
Dodd-Frank talks about the swaps market as a whole – meaning all swaps. Sure, it breaks out securities based swaps and a few others, but the intention seemed to be that they wanted all swaps regulated. But as I much as I’m for the idea of not creating loopholes – intentionally or otherwise – its really hard to lump FX swaps in the same bucket as CDS and even IR swaps. Its just a different product with a different use, not to mention a product that sees the transfer of concrete assets – namely currency.
But all of that aside, its just too politically complicated to regulate FX. Countries (and Unions for that matter) are proud of – and control – there own currency. Putting specific regulations non those transaction in the US only might annoy not just traders but other central banks. It is possible that even though FX swaps had nothing to do with the world’s issues in 2008 they could have something to do with the next crisis, but it certainly seems unlikely. My comments in the FT on the topic:
“There are a lot of geo-political issues involved in the US trying to regulate currency trading,” said Kevin McPartland, senior analyst at Tabb Group. “In the end that’s what will lead Washington to exempt currencies as an entire asset class from their regulatory push.”
Despite the CFTC’s postponement of the SEF proposal release, debate still came on quickly as to their prescriptive approach surrounding trading model. These quotes are based on my commentary that we will publish early next week.
“With liquidity so thin, under this new model the simple presence of a quote will alert the rest of the market that someone has an interest in a certain contract,” says Mr McPartland.
“This type of information leakage will create a huge opportunity for others to game that order by trading in front of it which could potentially move the price against the quote requesting firm,” he says.
Interest Rate Swaps have taken over for CDS as the OTC derivative product in focus for market participants and regulators. They look to be the products that will see the biggest jump in clearing once new rules are in place and they also seem to be the first headed for more electronic trading. My two cents in the FT article regarding the IDB’s opportunity here:
“A good portion of the swaps market activity is dealer to dealer, and the inter-dealer brokers handle the majority of that volume,” says Kevin McPartland, a senior analyst at Tabb Group.
With the financial reform bill officially law its time to get down to details. One big area in need of clarity is OTC derivative executions which includes the soon to be defined Swap Execution Facility. This FT article goes through the ins and outs and winners and losers when it comes to SEFs. My comment in the article:
Analysts at Tabb say the interdealer brokers with a few non-broker platform providers will become the dominant trading venues for OTC derivatives. They say established exchanges with clearing houses such as the CME, NYSE Liffe and Eurex are better placed to clear swaps, rather than to trade them. “Trading swaps . . . does not translate well into a listed-exchange model,” says Kevin McPartland, an analyst at Tabb.
This article provides a good overview of OTC derivative market regulation and the views of various industryparticipants. I like how I’m quoted here – gives good insight into my views on the subject:
…however, most in the industry feel more regulation is pretty much a given. “Regulation of the OTC derivatives market is inevitable – like heat in the summer, it’s coming,” says Kevin McPartland, senior analyst at financial markets research and advisory firm, TABB Group. “OTC derivative markets need a reduction in systemic risk and increased transparency; unfortunately, industry initiatives to improve both have proven not to be enough.”
Definitely worth a read. The full article here.