The need to comply with new reporting regulations is encouraging market participants to overhaul their back offices, with buy-side firms exerting greater control over their post-trade operations, according to Simona Catanescu, director of post-trade markets, Asia-Pacific at messaging network provider SWIFT.
Across this year and last, major Asian financial hubs have been putting in place new reporting requirements for OTC derivatives, as required by the Group of 20 as part of global, coordinated efforts to reduce systemic risk.
The Monetary Authority of Singapore (MAS), for example, introduced reporting requirements for OTC derivatives starting with interest rate swaps (IRS) and credit default swaps (relatively low-volume instruments in Singapore), before mandating centralized reporting in the much bigger non-deliverable forward (NDF) market. MAS is scheduled to introduce requirements to report FX OTC derivatives to a licenced trade repository in two stages, in May and November.
While IRS is the biggest class of OTC derivative globally, FX derivatives dominate the Asian landscape, accounting for roughly three quarters of trading in the region ex-Japan. In a Celent analysis published in 2013, Singapore boasted the lion’s share (43%) of OTC FX trading in the region.
Catanescu says the staggered introduction of reporting requirements has led to growing levels of interest among market participants in post-trade automation. “Firms have been evaluating the solutions and vendors over the last 18 months. Reporting requirements have increased the need to improve and automate matching and confirmation capabilities,” she says.
Automation at the confirmation and matching stage can provide market participants with greater certainty that they are sending clean transaction data to the trade repositories that meets the regulator’s requirements. However, the ability to improve post-trade processing of derivatives trades varies significantly.
“There is a long tail of small firms that still confirm trades by fax or voice. For many larger counterparties, it is more cost-effective to pay for the installation of a terminal at such firms than to allow them to maintain manual confirmation. These terminals allow smaller firms to generate a SWIFT confirmation message at the touch of a button, which its larger counterparty can then process,” says Catanescu.
“From an internal perspective, those larger firms will also be looking to streamline and consolidate their matching capabilities, perhaps reducing multiple legacy systems involved in the process to just one or two.”
While a number of asset managers in Europe responded to ESMA’s ‘big bang’ approach to the introduction of OTC derivatives reporting requirements in February 2014 by delegating responsibility to their broking counterparts, a number of factors have resulted in a different outcome in Singapore.
“On the one hand, I think asset managers are keen to maintain greater control over regulatory compliance, and on the other, brokers are concerned about the liabilities they might be incurring by taking on reporting. As such, asset managers are working with vendors and IT boutiques to ensure compliance,” she adds.
Reporting Rules Prompt Post-Trade Revolution
The need to comply with new reporting regulations is encouraging market participants to overhaul their back offices, with buy-side firms exerting greater control over their post-trade operations, according to Simona Catanescu, director of post-trade markets, Asia-Pacific at messaging network provider SWIFT.