With a spike in cleared OTC derivatives on the horizon, asset managers are faced with the daunting task of reconciling their trading activity with involves multiple futures commission merchants (FCMs), each using its own reporting format.
That problem has been solved by Sapient Global Markets, which has published a new industry standard for cleared OTC derivatives-related activity reporting for asset managers, FCMs and custodians.
The Clearing Connectivity Standard (CCS) is a standardized connectivity format that can be used by the FCM community to transmit OTC clearing-related information on behalf of their asset manager clients to custodians.
As industry regulatory reform emerges, both the volume of cleared derivative trades and the number of relationships between market participants is growing.
“Asset managers requested custodians, such as BNY Mellon, State Street, and Northern Trust, to come up with a way to reconcile the reports they get from multiple FCMs, so the question became, why doesn’t the industry create a single standard for reporting,” said Jim Bennett, managing director at Sapient Global Markets.
“The absence of a formal standard for formatting or transmitting data between entities create delayed on boarding and increased operational risk, as well as cost of interface development and maintenance with each custodian,” Bennett said.
Sapient Global Markets collaborated with leading FCMs and custodians to develop the CCS, which has been adopted by the original project group of participants representing more than 12 firms and hundreds of end users in the buy-side community.
CCS will drive further automation of the clearing process, and reduce the overall costs of clearing swaps for asset managers, according to Sapient.
Working with project sponsors from across the industry, Sapient facilitated the definition of the common data format and file definitions for account balances, margins and fees, settlements, positions and daily activity.
“By overcoming the challenges faced by reading, interpreting and managing files sent in different file formats, the CCS will simplify integration with data systems and automate reconciliation in order to make clearing and communications more concise and efficient,” said Jos Stoop, director at Sapient Global Markets.
CCS will provide standardized connectivity and reporting initially for central counterparty-eligible interest rate and credit default swap products in the U.S. through LCH.Clearnet SwapClear and CME Group, with plans to expand to include additional products, participants, and geographies over the next year and beyond.
“Dodd-Frank requires OTC transactions to be cleared, so trades are migrating to CME and LCH, with downstream ramifications on operations,” said Bennett.
Future enhancements to the CCS will include a conversion of the standard to FpML on a real-time basis under the guidance of FpML Working Groups and additional product coverage.
The intent is to also broaden the range of participants to include additional FCMs, custodians, asset managers and CCPs. Discussions are continuing with ISDA on ongoing governance and oversight of the clearing and communication standard.