Clearing and settlement of derivatives could become even more complex when mandatory central clearing comes into force next year, unless automated post-trade standards are adopted industry-wide, according to Fidessa’s regulatory expert.
In a recent whitepaper published by the tech vendor Steve Grob, director of group strategy of Fidessa, argues the derivatives post-trade cycle remains incredibly complex due to the fact there are multiple brokers performing execution and clearing roles.
“What stands out is when you have separate executing and clearing brokers, which exists in the derivatives industry, that’s when the complexity begins to creep in,” says Grob.
The effect of this is even more fragmentation in the market.
“Because there is no standard workflow that sets out the right order to do everything in, you get lots of messages firing between different executing and clearing brokers, that then need to be communicated to the custodian and the clearing house, and that is an incredibly messy process,” he adds.
“When you start to multiply this with all the OTC products that are going to be centrally cleared, you will see an industry facing a lot of problems.”
The paper argues the derivatives industry should learn from its equities counterpart in Europe and how it achieved fully automated workflows with the move to a settlement cycle of T+2.
How it can achieve this, Grob argues, is by using existing open-source protocols that will help drive accurate processing and automation of post-trade derivative workflows.
The whitepaper calls for an adoption of automated FIX protocols, which manages the workflow of the trade throughout its lifecycle.
However, if the industry is to adopt these standards, it could have a mixed impact on the role of custodians.
“The reason why a lot of them are able to step in and carry out clearing and settlement roles is because the system is so complicated. So on the one hand, the complexity is good for the value of their offerings, but if it were to simplify it might devalue their proposition,” Grob says.
“But from all the conversations we have had, I think they will support making the derivatives market more efficient, as fewer errors is what it is all about.”
Post-Trade Standards Needed for Derivatives Industry, says Fidessa’s Grob
Clearing and settlement of derivatives could become even more complex when mandatory clearing comes into force next year unless automated post-trade standards are adopted industry-wide, according to Fidessa’s regulatory expert.