One of the more significant impacts of this current era of regulatory reform in the global Financial Markets industry is that many systems and processes – particularly across the middle and back office – are undergoing a complete overhaul and restructuring.
One example of this is in the OTC derivatives market, where the move towards a centrally cleared model is putting banks, brokers and other clearing firms under pressure to adapt their risk, clearing and post trade infrastructures to cater for this new environment.
Changes in post-trade systems are not only being driven by new regulatory requirements however. Firms operating in today’s Financial Markets face many other challenges too, such as changing client demands, lower margins, increased competition and a myriad of other business drivers, all of which eventually filter through to the back office.
From the perspective of clearing intermediaries and Central Counterparties (CCPs), the technology implications of all of these changes are significant, as new services have to be created from scratch in order to cater for new operating models, or at the very least existing systems need to be re-defined to handle things like segregated account structures, particularly for the management, movement, tracking & optimisation of collateral, for example. And all of this comes with a need for greater real-time risk calculation & aggregation.
Given these challenges and the potential costs and disruptions they engender, many firms are now looking at how they can reduce complexity in their post-trade processes. In short, they are looking at how they can take a more agile approach to clearing.
One key element that can help with all of this is greater standardisation. As clearing and post-trade systems need to exchange data in multiple formats across multiple sources and destinations, interoperability between these systems has become increasingly important. Systems therefore need to be adaptable, scalable and easily integrated with other platforms via well-documented APIs.
Another element that can help reduce risk is greater use of real-time processing, particularly around aggregation and netting of positions, and increased real-time monitoring, not only of positions and their associated risk, but also of the movement of collateral. In the past, much of these processes have been run in batch at the end of the day, but today it is becoming increasingly necessary to be able to track these things on an intra-day basis. Even where processes are run in batch, the technology should be there to deliver results in as short a time frame as possible.
A number of firms are now investigating how Blockchain and distributed ledger technology can be implemented to bring greater efficiencies to the post-trade landscape, whether for clearing, settlement, collateral management, trade repositories or other areas. There does indeed seem to be significant potential for disruption in this space. However, although there have been a number of high profile use cases and proofs of concept – many of which look promising – these are still early days and it remains to be seen how and where Blockchain will make a significant difference in clearing and post-trade.
In conclusion, clearing technology should be an enabler to help firms streamline their post-trade processes and deliver results in a timely way to better manage risk. Given the amount of changes that are currently occurring in the clearing space – and with changes likely to become more and more frequent in the future – clearing intermediaries and CCPs will need to ensure they have the appropriate technology that is not only robust and stable enough to handle current processes but also agile enough to reflect those changes. They will struggle if they continue to rely too heavily on legacy technology that acts as a hindrance to operational changes, rather than an enabler.