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environment and the tools needed for connection, reconciliation and the associated work-flows to the exchanges.
Managing margins
Te introduction of clearing for FX options, currency swaps and non-deliverable forwards (NDFs) will bring with it a new requirement within the FX market to manage initial and variation margins for the first time. Dennelly believes that this is something the interbank market could learn from the FX retail market, where margin trading is well-established. “Tis is a new requirement for some in FX --monitoring and managing client exposure, and the associated collateral, in real time. Tere is also most likely going to be a drive towards cross-product margining from more sophisticated customers. Where collateral is already held, customers will want it to be able to better leverage this across different asset classes.”
Jim Dennelly
“Tis is a new requirement for some in FX -monitoring and managing client exposure, and the associated
collateral, in real time. Tere is also most likely going to be a drive towards cross-product margining from more sophisticated customers.”
a matter of getting the transactions into centralised clearing, but also of how fast this can be done, and how quickly this can be translated into the risk management, of both the firm and the clearing agent.”
Wherever possible, Dennelly says, SunGard is leveraging the existing, and well-established, clearing systems it has built for clearing exchange-traded derivatives, especially in terms of the reconciliation and confirmation processes, however he stresses this can only be a starting point, or a framework, for further development is needed to process the work-flows of more complicated OTC trades. “It is not just a case of modifying a few identifiers, while the process is similar, the underlying instruments differ greatly in complexity and variations,” he adds.
However, he believes that the new clearing requirements provide an opportunity for SunGard’s users to consolidate their clients’ clearing activities into a single pipe, which will mean much higher volumes going to the clearing entities and exchanges. One of SunGard’s strengths, he says, is handling large volumes to the exchanges, a deep understanding of the clearing
100 | january 2012 e-FOREX
Te spotlight on liquidity management means that a very important issue going forward is the speed of processing. “I don’t think that intra-day is going to work in this new environment,” says Dennelly. “Te push for higher levels of collateralisation means that it is going to have to be in real-time.” SunGard developed a real-time margining tool some years ago for retail introducing brokers, and has been approached by several large banks about expanding this to manage margin requirements for FX cleared products. Clearing entities are currently building both connectivity solutions and margining monitoring tools.
Despite this, Dennelly does not believe there is much to be gained through building proprietary solutions for clearing FX OTC. He says: “One of the key issues when deciding whether to build internally or externally has got to be the cost to bring it to market. Many will find that third party solutions make more sense.”
Dennelly believes that the introduction of clearing will simply put greater operational strain on firms’ FX back offices, and that is where much of the work needs to be done.
Flexibility
Given the complexity of the underlying instruments and systems, and the likelihood of change in the months ahead as regulators and providers evolve their rules and responses, Peter Kriskinans, managing director of DealHub believes the critical factor to consider in any technology response should be flexibility.
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