In their search for improved operational efficiency and straight-through processing (STP), broker dealers are seeing increased opportunity for constructive dialogue with their clients as a direct result of the threat from increased regulatory scrutiny in the equity derivatives market, says Detica, the business and technology consultancy.
In its recent survey “In Search of STP” Detica examined the equity derivative landscape across nine leading investment banks. It found that the sheer diversity of market participants, an explosion in data volumes, increasing product sophistication and varied regulatory jurisdictions are combining to create a complex market environment with significant operational challenges.
“Market evolution and growing operational challenges have brought about increased regulatory scrutiny, however we found that broker dealers are not necessarily considering this a threat. Moreover it gives them a reason to engage in a more focused dialogue with their clients, providing an opportunity to improve operational capabilities,” says Ivo Stoyanov, executive manager, Deticas New York office.
The unique breadth of client types in the equity derivative markets means banks counterparties are often operationally unsophisticated and unable to process their transactions efficiently, adding to their operational burden.
“To succeed, broker dealers have to satisfy the demands of diverse client needs, growing trade volumes and increased regulatory controls. This means investing in improved operating models and new technology. This will enable them to tackle globalization and the demand for lower cost processing, and at the same time deploy front office risk management frameworks to minimise their potential exposure to arbitrage,” adds Stoyanov
The Detica survey confirmed that the equity derivative market is lagging behind its OTC cousins in fixed income in the development of electronic trading and basic operational STP. Electronic trading remains in its infancy: although a handful of single-dealer platforms are in existence, Detica found that across the survey participants both capability and appetite are low.
Detica also found that the most significant investment across all participant banks remains focused on improving basic STP rates for vanilla transactions. Exploiting market initiatives in the interest rate and credit derivative markets, the leading equity derivative dealers are either using, or planning to use, both Swapswire and DTCC for trade affirmation and confirmation matching.