SS&C GlobeOp has been a provider of processing services for OTC products for 15 years. I met with Tom Kirkpatrick and Alexandra Gillespie to discuss how they faced the challenge of regulatory change with the added pressure of many clients relying upon them to update their processing platform to support their requirements.

SS&C GlobeOp has been a provider of processing services for OTC products for 15 years. I met with Tom Kirkpatrick and Alexandra Gillespie to discuss how they faced the challenge of regulatory change with the added pressure of many clients relying upon them to update their processing platform to support their requirements.

Q: Hello Tom, which areas of your firm were affected the most by the new regulations?

A: Regulatory reporting has had the widest impact, affecting most of our clients. As a result, we have had to invest up front in our technology and processes to deal with the changing requirements in Europe, and the different reporting models between the U.S. and Europe.

We were one of the first firms to provide a solution to meet the ‘Form PF’ (private funds) requirements for the SEC. This requires a combination of operational, statistical and risk information on each fund, which funds must report either quarterly or annually based on their size. Individual requirements aren’t necessarily so difficult to produce, but taken as a whole, it is a complex process to assemble the wide range of components. Some fund managers can meet these requirements in house, but many have chosen to outsource the production to us. While managers remain responsible for the final review and approval, they have been able to draw on our experience in completing returns and our interaction with the SEC to make sure our solution is really meeting their needs. The Form PF solution was in place in 2012, so preceded AIFMD and some of the OTC requirements, so this gave us a platform to expand.

Firms need to meet reporting requirements for multiple regulators. To achieve this, our approach was to gather a common data set and build the new requirements into the standard work flow. We felt this was the best way to build a robust and reliable reporting infrastructure. Our processes are based on taking trade data, validating it, and then publishing it in multiple forms, whether that be a risk report, a NAV statement or a regulatory report.

This has taken a couple of years working with a wide range of stakeholders to develop a solution. It isn’t yet completely clear how regulators will use the data, but we can see an ever increasing group of regulators who will need data on our clients’ funds, which we can now meet with our integrated reporting platform.

Q: There has been much debate and comment in public about the form of the EMIR reporting requirements and the aggressive timescale to be ready for February 12th this year – how did this go for you?

A: The EMIR project went very well for us and for our clients relying on us to meet the reporting deadline. We were compliant on February 12th for transaction reporting and also later on August 11th, for valuation and collateral deliveries.
Our general approach was very like the one we took on Form PF. We developed our systems so that the EMIR data requirements were embedded into our existing transaction process flow from the beginning; thereby ensuring that our solution will be accurate, reliable and robust in a business as usual environment, for the long term. We prefer this kind of industrial solution (even though it takes more work) over a typical ‘bolt on’ solution, because in our experience, it provides better long term security and scalability for our clients.

We adapted our platform at a fundamental level to capture the additional data required for EMIR reporting purposes. Although our existing systems are data rich in any event, we needed to capture a few additional details – such as time of execution, LEI and UTIs before we could start composing that data into the format required by the trade repositories (TRs).

We chose to connect to two European TRs initially. We did this to give our clients a choice of data destination and provide a back up in the event that one failed to meet the February deadline. As many market participants will testify, the constantly changing requirements in the run up to the deadline caused significant con- cern to technicians. Despite good intentions and best efforts on all sides, sensible testing plans were shelved in some cases as technicians raced to adjust deliveries to match the TRs changing criteria, (especially in some cases, adjustments to the requirements were still being published right up through January). We were lucky that this was relatively smooth for us, probably because we had spent a long time working closely with the TRs and building effective relationships. We will continue to connect to other TRs in the future and the third is coming on line soon. This will give our clients increased flexibility and choice. As the end of the first year of reporting approaches we are seeing clients switch providers; using us as their reporting engine, this is easy for them to do without additional work on their side.

We are now reporting on over 400 LEIs daily, and by year end will have delivered around 50 million rows of data to meet EMIR reporting requirements.

Q: Matching rates between TRs in Europe are reported to be low, what is your view on how to solve this?

A: We reconcile OTC trade data to counterparties daily in any event; this reconciliation is part of our standard life cycle process. It will help us reduce the likelihood of a break within the TR reconciliation, but does not cover all the data we would ex- pect the TRs to be reconciling. At this time we are not expecting the TRs to start their reconciliations soon. We hear that there are some significant hurdles that need to be overcome before that is possible, including work on the quality and consistency of data delivered to TRs. What we can helpfully say is, if any TR needs a flexible, robust reconciliation tool to use for this purpose, we have one ready and waiting which can handle the huge volumes of data they need to deal with.

Q: How will you prepare for the new European clearing mandates? What will it mean for your clients? A typical clearing implementation project can take months to complete.

A: Initially I would say that clearing OTC derivatives is a well travelled path for us. We have been clearing for our clients in Europe for well over a year. Any client of ours which has agreed terms with a clearing broker (we are connected to all the main ones) can start clearing almost immediately. For a new client clearing will be switched on as a standard option during implementation. The time to market is reduced to the process of choosing and negotiating a contract with your clearing broker.

Cleared OTCs follow a trade processing flow which is fairly similar to futures and options and for us just as straight through. We have swapped bilateral confirmation with counterparties and direct payments between counterparty custodians, with central clearing using clearing broker accounts and central clearing houses. Valuations and collateral can no longer be disputed and payments requirements net across initial and variation margin, funding and upfront fees. This means that middle offices are responsible for immediate and accurate record keeping, data aggregation across different clearing brokers and extensive reconciliations.

With the implementation of Mifid 2 we shall see exchange trading for standardised OTCs and accordingly it will be interesting to see if the market operating model will obviate the need for affirmation platforms or not. We are of course poised to respond to any new requirement.

Given the experience we already have in OTC clearing and dealing with many clearing brokers both in Europe and the US, we are well placed to help our clients through the process of selecting clearing brokers, especially where that includes suggesting good questions for RFPs and or assisting in assessment of responses and performance during due diligence meetings. Where ever we can, we bring the benefit of our processing knowledge and experience to support clients in new operational areas, though we will stop short of making recommendations.

At this time we recommend to firms to start work on setting up clearing solutions well ahead of the deadline next year. Clearing brokers will get busy as the deadline approaches and it would be sensible to be successfully clearing with them before the process becomes mandatory.

Q: Alex, how does the SS&C GlobeOp platform cope with OTC products subject to margin requirements?

A: We have an end to end systematic collateral capability which has been in place for many years and aggregates collateral across bilateral and cleared OTCs, securities lending and repo deals. Collateral is a constant area of focus for us and our clients. We can be particularly effective for our clients since we independently value the OTC transactions and the collateral daily. This gives our customers comfort they have minimised their exposures. We expect to see significant change in the collateral market as the requirements for collateral increase and the complexity for dealing with the collateral process increases along side.

For example, we have been looking at the IOSCO/ BSCS requirements for non-cleared OTC derivative collateral to determine if there is anything in them which we are not currently set up to support. We are also considering how the valuation process for OTC derivatives will be affected by the quality of collateral used and what implications that will have for clients’ decision making processes. Matching the requirements should be relatively simple for us, given our existing infrastructure and expertise in valuations and collateral processing, but as we see a condensed timescale for the collateral we are increasingly aware that many firms face a significant challenge to keep up.

Q: How do you see the future of OTC processing?

A: The future is more complex, ever changing and more expensive. Regulatory requirements, however well meant, have seen to that. Many institutions will have to increase investment in their technology and recruit and retain expensive experts to understand and respond to the changes.

Whereas clients used to outsource to providers such as SS&C to cut costs in processing we now see a shift in motivation to include: accessing pools of expertise and experience; being able to aggregate data across fragmented data providers (affirmation platforms, exchanges, clearing brokers, custodians, counterparties); responsiveness to regulatory change; process adjustment for market structure shifts; and protection from future costs of updating or replacing outdated systems.

We have assembled the expertise in systems, operational processes, controls, collateral, valuations and margin calculations to make it possible for firms to continue to access OTC markets and still be on a robust automated platform.

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