With OTC derivatives being transformed from a bilaterally traded and cleared model to an exchange mechanism, the infrastructure for post-trade processing is being reinforced to handle the expected loads.
MarkitSERV, a provider of electronic trade processing for OTC derivatives, said this week that its buy-side clients have used its platform to route more than $3.5 trillion dollars in notional value of swaps to central clearing counterparties (CCPs).
“We think that a significant majority of cleared buy-side trades utilized the routing and trade management services provided by MarkitSERV,” said Henry Hunter, head of business development and product management at MarkitSERV, a joint venture of Markit, a global financial information services company, and the post-trade giant Depository Trust & Clearing Corp.
MarkitSERV has built connectivity to a dozen CCPs and is in discussions with others that have yet to launch, according to the company.
“With a single connection to MarkitSERV, clients can access any CCP or SEF [swap execution facility] and connect with counterparts and FCMs [futures commission merchants],” Hunter said. “By investing heavily in building and maintaining the connectivity the industry requires, we removed those burdens from dealers and buy-side firms that would otherwise have to develop their own connections.”
One of the goals of the impending regulations, in accordance with the G20 group of nations’ diktat to introduce far-reaching reforms to the $700 trillion global OTC derivatives market, is the introduction of central clearing which allows electronic confirmation and settlement of OTC derivatives.
“Both buy and sell side firms are investing significantly in systems that provide the required connectivity,” said Rohan Douglas, chief executive of Quantifi, a provider of analytics, trading and risk management solutions to the global OTC markets. “In this new environment, the emphasis is on efficiency, automation, connectivity and transaction cost. In many firms we are seeing a trend towards specialized, best-of-breed components that provide a more flexible trading infrastructure.”
OTC valuation and risk management has become significantly more complex given market changes and new regulatory requirements. At the same time, market liquidity has suffered in some segments and volatility has increased.
The net result, said Douglas, “is a significantly increased focus on transparent, independent valuation and risk management. This focus has been intensified and driven by a series of events like JP Morgan's 'Whale’ trade [where the bulge bracket U.S bank announced that its losses had swollen to $5.8 billion following an earlier trading fiasco at its London office. The losses were linked to a London-based trader nicknamed the ‘London Whale’].”
To help manage the workflows required by clearing, MarkitSERV has developed Trade Manager, a user-friendly interface that enables clients to directly control trade routing and manage cleared trades alongside non-cleared trades.
Together with trade body the International Swaps and Derivatives Association (ISDA), Markit has launched ISDA Amend, a compliance service that uses Markit Document Exchange to facilitate sharing of trade documents with multiple counterparties electronically.
“The business conduct rules enacted by the Commodity Futures Trading Commission require that ISDA master agreements maintained by dealers and their buy-side clients be updated and supplemented with new information,” said Hunter at MarkitSERV. “The ISDA Amend system automates the process and enables the required amendments to be electronically generated, administered and executed.”
Regulatory reporting requirements have increased significantly, driving many firms to centrally manage and collect data for the first time.
“For many firms this is the first stop in one of many from the impacts of the new regulations,” said Douglas at Quantifi. “The Basel III requirements around counterpart exposure in particular require significant amounts of market, trade, counterparty and legal data from across the firm. Big Data will become an overused term for banks.”
