TABB Says Dealers and Clearinghouses Need to Make Huge Investments and Upgrades to Current Clearing Technology

Global regulators focusing on the clearing of OTC derivatives have started a technology revolution, says TABB Group in new research published today, “OTC Derivatives Clearing Technology: Bringing the Back Office to the Forefront.”

“OTC derivatives reforms are causing headaches all over Wall Street, the City and beyond,” say Kevin McPartland, a TABB principal, director of fixed income research and co-author with senior contributing analyst Finn Christensen. “Unfortunately, current clearing infrastructures are neither scalable nor flexible enough to handle the changes ahead, a fact driving a wholesale change from overnight (or longer) processing to near real-time clearing expected to occur during the next three to five years.”

Anticipating an increase in transaction volumes is a key component to the clearing technology roadmap, and using listed-derivatives markets as a guide, TABB estimates that as new trading and clearing mandates are implemented, transaction volumes could increase twentyfold with market data volumes rising three to four times above current levels. “Not only must clearing infrastructures be scaled up but upgraded in such a way that they can scale further if transactional growth exceeds current estimates,” McPartland says.

Despite the fully staffed IT teams and eight-figure budgets at big global dealers and some clearinghouses, the authors explain, building out this infrastructure will be difficult without third-party assistance. “Technology providers have already stepped in to revamp legacy systems and build new technology that solves many of the issues born from expected regulations. The biggest market participants will take a best-of-breed approach, utilizing the best off-the-shelf products they can buy and tightly integrating them with systems that are built by in-house staff.” They add that most buy-side firms expect swaps dealers and their service providers to provide the necessary connectivity and interfaces.

Real-time clearing of a broad range of OTC products will happen, McPartland says, as market participants and regulators demand it and innovative technologists 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.”

Based on conversations with clearinghouses, swap dealers, technology providers and buy-side clearing specialists, the 21-page TABB report with 8 exhibits examines the impact new OTC derivative regulations will have on clearing technology for both sell side firms and clearinghouses; the cost of implementing the technology needed to handle real-time clearing and intra-day margin calls; and a view of the new clearing workflow.

The report is available for download by TABB Group Research Alliance Derivatives clients and pre-qualified media at https://www.tabbgroup.com/Login.aspx. For an executive summary or to purchase the report, visit http://www.tabbgroup.com or write to info@tabbgroup.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 “first-person 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.