TABB Group has released a report on the challenges caused by OTC derivatives reforms which, according to TABB principal Kevin McPartland, “are causing headaches all over Wall Street, the City and beyond”.

According to the report “OTC Derivatives Clearing Technology: Bringing the Back Office to the Forefront”, regulators’ focus on the clearing of OTC derivatives has started a technology revolution. There is a need for major upgrades and investments in clearing technology to cope with an estimated twentyfold increase in transaction volumes and demands for lower processing latencies within clearing. There will also be increased complexities in margin requirement calculations, and finding offsets within portfolios to reduce margin requirements, straining systems further.

The study looks at the impacts that new regulation will have on clearing technology for sell-side firms and clearing houses, the cost of implementing the technology for real-time clearing and intra-day margin calls, and presents a view of the new clearing workflow. “This report captures highly relevant and urgent issues that the clearing industry faces today,” comments Nils-Robert Persson, Executive Chairman of Cinnober. “Pressure from regulators and market participants has made it clear that the current post-trade infrastructure doesn’t cope with many of the challenges that we’re facing today, in terms of calculation complexity, speed and transaction volumes.”

“We’ve been involved in sophisticated clearing solutions for over a decade, but increased our focus three years ago as it became evident after the Lehman crash that not having real-time control of positions and risks should be against the instinct for self-preservation of any participant in our markets,” Persson continues. “The key characteristics of our offering in this area are flexibility and scalability that enable true real-time clearing and risk management over multiple asset classes. Technology is an enabler and must never become a bottleneck in the development of efficient and secure services”. 

“Real-time clearing of a broad range of OTC products will happen,” McPartland says, “since market participants and regulators demand it and innovative technologists will guarantee it. These improvements will come in phases, paralleling regulatory rollout and growth in clearing volumes. The first phases are underway and clearinghouses and dealers understand the winners will be those who can consume and disseminate data elements critical to trading, clearing and reporting in the least amount of time. But technology is the key catalyst behind the elimination of existing inefficiencies, reduction of expensive manual resources and lowering of operational risk.” 

The report is based on interviews with clearinghouses, swap dealers, technology providers and buy-side clearing specialists. Authors are TABB’s Kevin McPartland, director of fixed income research and senior contributing analyst Finn Christensen. 

To get a copy of the released report, please e-mail otc-clearing@cinnober.com.

For further information, please contact:
Nils-Robert Persson
Executive Chairman
Cinnober Financial Technology AB
Tel. +46 70 552 52 28
nils-robert.persson@cinnober.com

Martin Rabkin
TABB Group
Tel: +1 914-420-5739 
mrabkin@martinrabkinink.com

About Cinnober Financial Technology
Cinnober provides mission-critical solutions and services to leading trading and clearing venues. Cinnober’s solutions are based on the TRADExpress™ Platform incorporating everything needed for mission-critical solutions in terms of performance, robustness and flexibility. The portfolio of offerings includes price discovery and matching, real-time risk management, clearing and settlement, data distribution and surveillance. Cinnober’s customers include Alpha Trading Systems, Borsa Italiana, Burgundy, Chicago Board Options Exchange, Deutsche Börse, EDX London, Eurex, Hong Kong Mercantile Exchange, London Metal Exchange, Markit BOAT, NYSE Liffe and Quadriserv. For additional information, please visit www.cinnober.com.

About TABB Group
TABB Group is the financial industry’s only strategic advisory and research firm focused solely on capital markets. Founded in 2003 and based on the proven interview-based research methodology of “firstperson knowledge” developed by founder Larry Tabb, TABB Group analyzes and quantifies the investing value chain from the fiduciary, investment manager, broker, exchange and custodian, helping senior business leaders gain a truer understanding of financial markets issues. For more information, visit www.tabbgroup.com. 

In January 2010, TABB Group launched TabbFORUM, the online community currently with more than 8,500 capital markets members, drawn from buy-side and sell-side firms, exchanges, regulatory agencies,academia, consultants, vendors and media, focusing on issues covering current industry-wide topics.