Is this the end of new regulations for OTC derivatives? From January 2018 the major pieces of regulation since the 2008 crisis are in place, stable and not likely to endure major change. On the other hand Brexit, Donald Trump and the EMIR review may bring continued change driving yet more investment in compliance projects, keeping everyone busy.
What does this mean for firms who have been working at breakneck pace to meet the deadlines and in one form or another invested in systems which over time need continued maintenance?
At a conference in September the audience responded that the biggest barrier to reducing the cost of STP was their own systems – and secondly the complexity of OTC products. The former isn’t easy to solve as the effort and cost to replace even smaller systems is immense – driven by the number of integration points, functionality and the need for a clean transition from the old to the new.
The total lifetime cost of a system has to be considered over a five or ten year horizon when choosing how to invest, as this appears to be the typical life span of a system. Against this new ‘reg tech’ firms are using intense focus on specific parts of the OTC processing chain to bring solutions which move quickly compared with larger teams, and sometimes deploy their tools entirely via a web browser eliminating the need for any software installation on the users desktop.
Is it still necessary for firms to own a sizeable team of IT people when the options for lower cost STP are growing, these are the high level alternatives I can see:
- Outsource your OTC processing to an administrator. You negotiate your level of service and responsiveness into a contract, and trust your service provider to take on the burden of regulatory compliance and new product support
- Embrace market infrastructure: The DTCC Trade Information Warehouse for credit derivatives and the LCH SwapAgent platforms both provide STP from confirmation through to settlement. You will still need your own IT team to integrate with these platforms and provide the other components of your processing chain.
- Go for the cloud, an increasing number of solutions can be delivered directly to users desktops and be run offsite. There are trading platforms, limits management, collateral management and risk management services to choose from – although finding a complete front to back cloud-based STP approach may not yet be feasible
- Choose a vendor, with FIS (née Sungard) a traditional software vendor engaging with Barclays to process a portion of their trade portfolio, software vendors see outsourcing and the cloud as an ideal way to move into a new commercial space and deliver their platforms to users.
If I were looking five years forward, with the margin and clearing regulations having incremental impacts year by year, and the technology options (including distributed ledgers) continuing to expand, now might be the time to re-shape your STP approach towards the mythical ‘zero touch STP’ and the major steps needed to eliminate cost from the back office.
Should you continue to own your own technology infrastructure or try another approach? Now is the time to decide, as the OTC market is likely to be more stable in the next few years, capital and margin charges will increase the need to reduce costs, so a long term vision for STP is what firms and the industry needs. Take a look at the article on the ISDA Common Domain Model in this edition and the recent paper by ISDA and LinkLaters on the future of law technology and see where things might be heading.
This article was first published in edition 10 of Rocket, our magazine. Download available Rocket editions here, and save your up to date address in your profile to to indicate your interest in receiving a printed copy of the magazine. Copies are also available to purchase and subscribe to via the shop.
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