New regulations of OTC derivatives including Dodd-Frank and European Market Infrastructure Regulation (EMIR) will force market participants to spend approximately $6.7 billion on technology upgrades between 2011-13, according to a new white paper from SimCorp StrategyLab.
The white paper, Dealing with the regulatory tsunami in capital markets: a spotlight on changes in OTC derivatives, co-authored by Gert Raeves, research director, and Dushyant Shahrawat, senior research director of CEB TowerGroup, says central clearing of derivatives will put buy-side firms in an unfamiliar positionbecause they are not used to posting margin for OTC trades, which will alter their decision-making processes.
As a result, firms must rework internal procedures as these market structure changes will impact pre-trade, trade and post-trade processes, according to the paper. Primarily, buy-side firms must focus on optimizing working capital and collateral.
The industrys working hypothesis seems to be that there is no pressing need to invest in infrastructure when so much is still uncertain, Raeves and Shahrawat say in the paper. However, delaying the investment in connectivity or misjudging the trade-off between convenient connectivity and flexibility will delay institutions abilities to optimize their collateral management practices, not to mention eventually meet new requirements in the OTC derivatives market.
The paper also says post-trade silos of the OTC derivatives market are not adequately addressed by the current straight-through processing infrastructure. Among the issues that still need to be addressed include connectivity, data extraction, message transformation and standards, and matching and reconciliation, the paper says.
The paper makes the case for firms using an integrated solution housing all positions and transactions across asset classes.
Siloed systems make it nearly impossible for investment managers to access consistent data firm-wide, says Ingo Walter, director of SimCorp StrategyLab. 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.
(CG)