FX MYTHBUSTERS
the vast majority of FX participants, consolidating all trade processing activities within a single processing structure will create significant cost efficiencies and will reduce operational risk.
No one solution fits all. As a broker-dealer with many and different sources from which to derive data, we would be much better served by building and managing our own connectivity.
KT: Tere has been a lot of debate among broker-dealers around the ‘build or buy’ connectivity conundrum. All but the very largest houses have elected to use middleware providers for trade reporting and all of the G14 banks are already subscribers to the MarkitSERV FX platform for clearing. Since trade reporting offers the greatest potential scale economies, it is reasonable to suggest to smaller players that going it alone will be too expensive, now and going forward.
Middleware simply connects the pipes; there is not much added value from appointing a third party provider.
ND: MarkitSERV’s FX platform has been developed with significant contributions from major buy- and sell-side players. Both constituents have designed it to deliver significant additional trade processing and workflow management.
For most parties, reporting will involve more than just the submission of trades to a Global Trade Repository, including but not limited to RCP (reporting counterparty) determination, USI generation and message validation. In addition to these specific functions, the MarkitSERV FX hub offers additional value in respect of normalising messages from and across multiple venues and enhancing post trade efficiency with allocation, aggregation and other workflow management tools.
Trying to improve FX STP at the same time as complying with new regulations for mandatory clearing and reporting complicates things and slows them down. It’s best to focus on compliance only at this stage.
ND: Whether mandated or not, all new requirements in the FX post trade space fall under the generic STP umbrella – with an emphasis on ‘straight through’. Rather than dealing with compliance in isolation, we encourage clients to take a more holistic approach to their post trade processing and workflow management requirements, instead of trying to bolt on new systems and processes randomly to an existing infrastructure.
118 | july 2012 e-FOREX
It’s only mandatory to clear and report trades; same day confirmations are not mandatory, nor will they be in the near future.
KT: Tis is not entirely correct; reportable, cleared trades are subject to mandated confirmation time scales. Per Dodd-Frank, if a trade is accepted for clearing by a DCO (Derivative Clearing Organisation), the DCO must report all confirmation data “as soon as technologically practicable after clearing”. For non-cleared transactions, the RCP (reporting counterparty) must report all confirmation data “as soon as technologically possible after confirmation”, and no later than 30 minutes after confirmation (for electronic confirmations) or 24 business hours after confirmation (non-electronic). Electronic, same day (T+0) confirmation of all trades is also supported as best practice by the Bank of England and Federal Bank of New York.
Referencing previous answers, the most efficient way to manage mandatory and non-mandatory confirmation, reporting and clearing processes for FX – particularly given the continually shifting sands – is to let a middleware provider like MarkitSERV take the strain of managing the connections and the workflows – now and as they evolve.
Regulatory changes are simply adding clearing and reporting to the end of the process, they will not affect the entire trade lifecycle.
KT: Reporting and clearing are new and integral components of the total trade lifecycle. Reporting requires the generation a Unique Swap Identifier (USI) at – or very
shortly after – the point of execution. Tereafter, every economic change associated with the trade (e.g. amends/cancellations/allocations) may generate a new USI (and in respect of allocations, multiple USIs). Non-economic amends (e.g. fund name changes) will also need to be reflected at CCP(s).
Further, and prior to the creation of SEFs, it is anticipated that quoted prices will depend upon specific CCPs; as such, clearing workflow evidently extends to the pre-execution phase of the trade lifecycle. Cost of capital will also be affected by new margining and collateral requirements (which also impact risk and risk management). Given this, participants will have to build appropriate workflow support throughout the trade lifecycle - at the very minimum, to support USI capture (from SEFs, RCPs and/or CCPs themselves).
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