FEATURE
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Derenbach says: “Before ESMA becomes effective we can be a one-stop shop for participants to send their trades without having to look around for different repository service providers. Today, we receive the information from customers entering the trades into the web application of REGIS-TR or electronically via XML files. Te extension we are working towards is to also accept Swift messages so that the customers do not even have to convert the Swift message into an XML file but send us a copy of the Swift file and we convert it internally. Tis will make it extremely easy for participants using Swift to interact with us.”
Change is an opportunity
Derenbach believes the regulatory change is in itself an opportunity. Many service providers, across the different layers of the value-chain - trading, matching, clearing, reporting, exposure management and settlement - are stepping up to the challenge of offering regulatory compliance while seeking to increasing the efficiency of the process but also to offer additional, value-added services. “Admittedly, the flipside of the increased breadth of possible services that a customer can choose from is that the decision about which service provider and which service to use becomes more complex,” he adds, “but the end result will be more choice, more efficient processes, mitigation of counterparty and operational risk, and because this is a regulatory issue, budgets to allow such benefits to be more easily available within the community.”
Trade repositories will play an important role going forward, way beyond the pure reporting of trade data on different derivative product classes. Derenbach says they will possibly help provide the neutral third party valuation of trades, legal matching and confirmation of trades, without the need to go through a matching platform which might not be available for the complex trade executed or product class traded. In the area of exposure management, the collateralisation of non- cleared OTC derivatives trades, where the capital requirements in the framework of Basle III will increase significantly, they will be able to support access to alternative collateral pools, e.g. securities collateral.
Technology issues
Te next generation of technology will replace many legacy back offices in banks where the majority of IT funding has gone into the front end platforms. As result the back office has lagged significantly and Jim Dennelly, senior vice president, Treasury, at SunGard
46 | april 2012 e-FOREX
says that now there is an opportunity to streamline the process to make it more cost effective.
Dennelly says that the big two drivers that are pushing the next generation of FX back office technology are central clearing requirements and the ability to provide more real-time streamlined processing of these transactions. He says: “In the past they have been typically batched, there was a lot of manual intervention, even in the some of the larger institutions, on a day to day basis. Tis will change because they need to become more cost effective so they can be more competitive in the market, especially with all the internet platforms where customers can look at pricing, and regulatory requirements are going to force these changes.”
Although the introduction of clearing NDFs and FX options puts the focus primarily on post-trade processing, Dennelly believes it is going impact the full lifecycle of these trades, as they follow the flow of a future. “From a processing perspective this is significantly different from the current FX workflow. Te primary drivers being the ability to CCP matching up and agreeing to the trade as opposed to FX OTC world trades which are typically matched with Swift messages. With the status of matched and unmatched, what can be done in those intervals is significantly different because you are dealing with a central clearing party.”
As this adds more lifecycle events to a trade, that were not there before, all the systems from the traders managing their traditional risk to modifying a trade during the lifecycle, are going to have to change. Apart from the fact that executed trades will now have to be sent to the clearing house to be matched, collateral will now have to be posted and collateral positions now maintained and managed. Furthermore, for NDFs, the exchange rate cannot be fixed by users and has to come through a new interface, adding another level of complexity.
Architectures
Te regulatory changes could be seen as an opportunity to streamline and unify back office architectures. Says Dennelly: “I think there has been hesitancy until now to modify the back office. Te business has been more about gaining market share and increasing profits, but what is coming next is the ability to reduce costs and when you look at the amount of manual intervention that is required, on a day to day basis, in back office systems I think as
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