Regulations like Dodd-Frank and EMIR will profoundly impact capital markets industry and prompt an expected USD 6.7bn IT spend over 2011-2013
SimCorp StrategyLab, an independent research institution sponsored by SimCorp, has released a white paper entitled: “Dealing with the regulatory tsunami in capital markets: a spotlight on changes in OTC derivatives.” The paper examines the profound impact new regulations will have on the global capital markets industry, affecting competitive positioning of firms, market structure, revenue growth, profitability and IT budgets.
Co-authored by Gert Raeves, Research Director, and Dushyant Shahrawat, Senior Research Director of CEB TowerGroup, the paper explains that the move to mandate derivatives central clearing has direct implications on investment management companies’ back-office services. Central clearing puts buy-side firms in a precarious position, not only because they are unfamiliar with having to post margin for OTC trades, but also because this requirement will alter their decision making process.
Market entities and participants are emerging and new risk management measures are being imposed on buy-side firms. The paper determines that firms must rework internal procedures as these market structure changes will impact pre-trade, trade and post-trade processes.
The paper recommends that buy-side firms look at post-trade OTC processing through the lens of optimising working capital and collateral. Raeves and Shahrawat explain: “The industry’s working hypothesis seems to be that there is no pressing need to invest in infrastructure when so much is still uncertain. However, delaying the investment in connectivity or misjudging the trade-off between convenient connectivity and flexibility will delay institutions’ abilities to optimise their collateral management practices, not to mention eventually meet new requirements in the OTC derivatives market.”
Additionally, the paper argues that post-trade silos of the OTC derivatives market are not being adequately addressed by the industry’s current STP infrastructure. The paper points towards the following key elements needed to satisfy current and newly emerging needs:
Connectivity – Buy-side firms will have new venues to connect to across trading, clearing and reporting
Data extraction – Creating the right quality, comprehensiveness and timeliness of data needs flexible and scalable tools
Message transformation and standards – Adoption of new or updated message standards are a central part of the move to increased transparency
Matching and reconciliation – The prerequisite to central clearing will be that all trade details are agreed and matched prior to clearing and settlement
In examining the range of available vendor options, the paper notes several advantages of an integrated solution over a best-of-breed or centralised hubs approach. These include having a single system that houses all positions and transactions across different asset classes in a consolidated database.
According to professor Ingo Walter, director of SimCorp StrategyLab, “Siloed systems make it nearly impossible for investment managers to access consistent data firm-wide. An enterprise solution greatly alleviates data inconsistency which can cause delayed or inaccurate decision making. Additionally, integrated solutions can address not only OTC derivatives reform, but also requirements around MiFID II, Basel III and Solvency II.”
To download a copy of “Dealing with the regulatory tsunami in capital markets: a spotlight on changes in OTC derivatives,” please visit http://www.simcorp.com/Knowledge/White-papers/Download-the-OTC-Derivatives-white-paper
Enquiries regarding this announcement should be addressed to:
Lars Falkenberg, Assistant Director, SimCorp StrategyLab, +45 26 30 01 27+45 26 30 01 27
About SimCorp StrategyLab
SimCorp StrategyLab, an independent research institution sponsored by SimCorp, carries out extensive research in the investment management industry to identify and suggest ways to meet challenges within risk management, cost control and growth opportunities and to share best practices. The research programme is carried out in close collaboration with internationally recognised academics and established industry experts.