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It has been a very challenging environment for trading OTC derivatives since the 2007 financial crisis. Global regulations such as Dodd-Frank, EMIR, and MIFID II are placing a greater emphasis on the post-trade processing of OTC and cleared derivatives. The ongoing implementation of these regulations has forced asset management firms and service providers to revisit their middle and back-office operating models in order to become more efficient, transparent and above all automated.

These asset management firms have been under increased scrutiny since the financial crisis, and there is a need to ensure that both investors and regulators have a high degree of data integrity and back office accessibility. Thus, the pressure on data transparency, governance and management increases as operations strive to meet the demands of reporting, risk management and reconciliation. Such firms are forced to invest significant amounts of capital in order to comply with regulations.

The innovation at these firms has stalled as operations have been working on a limited budget with focus on cost control primarily due to the relatively lower fund returns since the crisis. Consequently, many of these firms continue to rely heavily on spreadsheets and manual procedures when processing derivatives1,4 which are error prone attracting scrutiny of regulators.

The pressure to change the operating model must be addressed both internally and externally due to increased operational costs. A recent report mentions that up to 50% of investment management firms continue to rely on legacy systems and this could lead to increased operational costs. Also, driving efficiencies and responding to changes are some of the key challenges these firms face. Therefore, the current operating model for processing derivatives must be re-engineered to address the needs of regulatory compliance and for the projected increase in the swap volumes as regulations mature2.

Firms need to address the above challenges by –

1. Building an efficient and automated operations workflow focused on optimizing business processes

  • To more effectively implement and be compliant with evolving global regulations without the need for such efforts to be big ongoing expenses

2.  Enabling transparency and automation for life-cycle management and processing of OTC and Cleared derivatives

  • To reduce operational risks and cost of manual errors

3. Meeting new business demands to aid in efficient hedging and/or to provide for enhanced returns

  • Through support for faster launching of new derivative instruments without the need for extensive manual work arounds

4. Embracing post-trade data as a significant competitive differentiator in positioning the firm for the future

  • To provide real-time analytics for needs such as alpha generation and operational cost analysis
  • To better meet the demands of risk management, reporting and reconciliation
  • To make operational teams even more effective and nimble to serve additional client demands

Benefits include reduced costs and optimized operations if implemented correctly.

What to do next?

Planning ahead now will prepare you for the future. Start thinking about your OTC and Cleared derivatives book of trades – where will these positions reside and how accessible will these positions be. Those that plan ahead and take action now will reap the benefits.     

As they say, Knowledge is Power. Welcome to the new world of derivatives reform!


In the next part we will review how firms can go about ‘Building an efficient and automated operations workflow focused on optimizing business processes’.


SOURCES – 1. Eagle White paper – The New Growth Enabler: Letting Go of Legacy Systems , 2. Greenwich Associates/Omgeo Report – Cleared Derivatives Processing: A Strategic Approach , 3. Markets Media – Asset Managers Face Operational Challenges , 4. SimCorp survey – Optimizing Derivatives Processing: ‘Alpha-tize’ your Infrastructure and Take Control of Capital

For an Overview of Swaps Processing....


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