Derivsource

This article offers a brief look back at key milestones and trends of 2024 before turning to the year ahead to discuss industry issues and initiatives that will impact the derivatives post-trade space in 2025.  Areas covered include regulatory changes, RegTech innovation, collateral management, clearing and settlement, digital currencies, reference data updates, and post trade risk reduction.

Regulatory compliance: Expect more harmonisation, innovation and enforcement

Leo Labeis, CEO of REGnosys

2024 was a landmark year for derivatives regulation, marked by the implementation of EMIR Refit in both the EU in April and the UK in September. These reforms aimed to simplify derivatives transparency obligations, increase alignment with global standards and strengthen market oversight. However, the contrasting approaches between the EU and the UK revealed challenges and opportunities for market participants.

The EU’s earlier deadline presented greater complexity, resulting in lower reported day-one acknowledgement (ACK) rates of just 60 percent. Trade repositories struggled with data exchange disruptions, leaving firms grappling with inconsistencies across jurisdictions.

In contrast, the UK benefited from an additional six months of preparation, leading to smoother implementation, higher ACK rates and encouraging rate of back-reporting uplift. Despite this progress, compliance teams face intensified scrutiny and growing challenges in managing dual compliance frameworks in a post-Brexit regulatory landscape. Traditional manual approaches to regulatory reporting have proven inadequate, emphasising the need for standardised, technology-driven solutions to streamline compliance.

While progress has been made in harmonising data standards, the journey toward global alignment continues. Firms must prioritise industry-wide collaboration, scalable compliance processes and the adoption of best practices to meet these evolving requirements efficiently and be prepared to navigate future data demands.

“As we move into 2025, the derivatives regulatory landscape will continue to be shaped by three overarching themes: global harmonisation, technological innovation and increasing regulatory enforcement. These trends build on the momentum of 2024, which marked a year of sweeping reforms and enhanced regulatory scrutiny across major jurisdictions.

1. Global Harmonisation of Reporting Standards

The adoption of standardised data elements like the Unique Product Identifier (UPI), Unique Transaction Identifier (UTI), and Critical Data Elements (CDE) has set a strong foundation for international consistency.

Continuing from reporting rewrites such as EMIR Refit, jurisdictions such as Canada and Hong Kong are preparing to implement updated trade reporting requirements in 2025, further aligning with global frameworks established under the Financial Stability Board governance. This push for harmonisation underscores the need for financial institutions to adopt solutions capable of managing overlapping regulatory requirements across regions, a necessity to ensure compliance and mitigate operational risks.

2. Technological Innovation in Compliance

The complexity of implementing these reforms has highlighted the critical role of RegTech in simplifying compliance. Within RegTech, Digital Regulatory Reporting (DRR), spearheaded by ISDA and now live across 6 derivative reporting jurisdictions, will continue its forward march. DRR is helping firms to navigate regulatory changes efficiently, reduce costs, and enhance operational resilience through the sharing of common reporting code. As regulators increasingly embrace data-driven frameworks, collaborative tools will become indispensable for financial institutions aiming to stay ahead of compliance demands.

3. Increased Regulatory Scrutiny

2024 witnessed a marked increase in enforcement actions, with hefty penalties levied against firms failing to meet trade reporting obligations. This trend is expected to intensify as regulators prioritise transparency and market stability. Financial institutions must not only comply with existing requirements but also adopt proactive approaches to ensure accuracy and timeliness in their reporting processes. Agile compliance platforms will be pivotal in mitigating risks associated with outdated systems and manual processes.

The evolution of derivatives regulation in 2025 will demand a strategic focus on adaptability and innovation. Financial institutions that leverage advanced RegTech solutions and collaborate on industry standards will be well-positioned to achieve compliance efficiently while gaining a competitive edge. By investing in scalable and forward-thinking platforms, firms can build resilience and thrive in an increasingly complex regulatory environment.” – Leo Labeis, CEO of REGnosys

Collateral management: Liquidity preparedness and margin efficiencies

Jo Burnham, Risk and Margin SME, OpenGamma

In the wake of various stress events that causes huge spikes in margin costs over the last four years, often involving non-bank financial institutions (NBFIs), there has been a move to investigate their role in the financial system more closely. To this end, the FSB recently published its final report on liquidity preparedness for margin and collateral calls, setting out recommendations for NBFIs trading cleared and uncleared derivatives.

The stress events are not black swan events – they reflect the vulnerability that the global financial system continues to have when it comes to liquidity strains. By taking steps to proactively enhance their own collateral management processes, non-banks can ensure they have enough liquidity available to ride out the storm without causing a bigger problem in the market.

“The mandatory clearing of US Treasuries is going to be a very key regulation in 2025, with competition heating up between clearing houses for market share. The greater choice will bring with it increased responsibility for due diligence to understand the different margin regimes employed by the new entrants. Additional choice of clearing house could present clearing members with more flexibility and cost-saving opportunities.

However, it will be incumbent upon market participants to be proactive in understanding their margin efficiencies at each clearing house, as well as what their wider margin costs and levels are likely to be under this new regime. There are tools and services to assess this, and insights can be drawn from existing bond and repo clearing structures. But it’s important to recognise that margin requirements will vary across products and markets. US cash treasuries, for example, cannot be viewed with a one-size-fits-all approach when comparing them to other government bond markets.” – Jo Burnham, Risk and Margin SME, OpenGamma

Clearing and settlement: Digital currencies and U.S. Treasuries come into view

Richard Metcalfe, Head of Regulatory Affairs, The World Federation of Exchanges

In 2022, international standard setters said that central clearing helped reduce market liquidity pressures during the 2020 volatility spike – in effect putting the emphasis on participants’ own preparedness. Specifically, the Review of Margining Practices by BCBS-CPMI-IOSCO indicated that CCPs cushioned the blow for the system during turbulent times. Since then, however, the debate has become blurred. In Transparency and Responsiveness of Initial Margin in Centrally Cleared Markets the standard setters’ Joint Working Group on Margin (JWGM) proposed a rather simplistic metric of CCP margin responsiveness to changes in volatility – a metric that attempts to address a multi-dimensional issue with an ‘up-down’ measure.

CCPs understand that there is much they can do to help participants understand why margin levels can change. But there is poor uptake of the education on offer. Moreover, the exact, specific changes in margin levels will always come down to the facts and circumstances at the time, which include broad market dynamics and not just an individual participant’s position – which may itself be dynamic. All this means that the rest of the package of JWGM proposals may be less useful than a degree of prudence and vigilance on the part market participants. Daily quantitative reporting, monthly back-testing at product level and simulation tools do not provide ‘The Answer’. A much better rule of thumb is the inescapable fact that market dynamics can change, sometimes abruptly, and margin levels have no choice but to follow.

“There will be plenty of known unknowns that will continue to play out in clearing and settlement in 2025. However, the most unusual development may be less obvious, and coming from a very different direction.

It’s time to think seriously about digital currencies. This is not about clearing (to be precise, settling) Bitcoin. Nor is it about stablecoins and their established fame as an alternative to fiat as a ‘ramp’ into and out of digital currencies. Rather it is about how the adoption of such coins by central banks for wholesale-market use is being watched very closely for use in the world of post-trade for traditional (real) finance. That starts to look even more interesting when you add their potential use as collateral (or store of value), and not just as a settlement (exchange of value) mechanism.

Put another way, tokenisation – long thought of as an advantage in trade execution – appears to have found what may prove to be its most beneficial use case in settlement and related margining. Most countries are looking to develop central bank digital currencies (CBDCs). None will have anything in place in the next twelve months, but the long-term scales required for planning systems changes mean that the whole ecosystem needs to start thinking about CBDCs within that time frame.

The attraction is the same as with stablecoins (cheaper and easier to use than fiat), but with the added benefits of being run by central banks. Tokenised bank deposits and (even better) govvies achieve a similar economic effect but widespread and even higher credibility has an obvious attraction. And, as compared with even the most truly stable stablecoins, there should be no concerns with CBDCs. In clearing, there has been a lot of use of cash in margining (even IM) for similar reasons. CBDCs can extend that logic.

Other issues will remain important: clearing of US Treasuries, shortening the securities settlement cycle in various jurisdictions, market preparedness for surges in volatility spring to mind. Just watch out for something else – something relatively low-key and slow-burn, with great capacity for long-term impact.” – Richard Metcalfe, Head of Regulatory Affairs, The World Federation of Exchanges

Reference data: The expanding role for OTC Derivatives Identifiers

Emma Kalliomaki, Managing Director, ANNA and the Derivatives Service Bureau

2024 has been a significant year for OTC derivative identifiers with the first UPI reporting mandate launching in the US on 29 January 2024. Since then, the EU, UK, Australia and Singapore have also begun UPI reporting as well as Japan, Canada and Hong Kong confirming compliance effective dates. Implementation of the UPI brings to fruition a G20 commitment to improve global oversight of OTC derivatives markets following the financial crisis.

Over 2024 there has also been a groundswell of impetus from both regulators and market participants alike to ensure identifiers for OTC derivatives suit their regulatory use case(s) as rules are refined. The European Commission consulted on modifying the OTC ISIN for price transparency and the FCA is currently discussing modifying the ISIN for transaction reporting. The FCA will use the UPI plus data elements for transparency.

The role and increased use of international standards in regulation on a global scale has continued, demonstrating the importance of data quality, coverage and accessibility, with ISO standards such as the ISIN, UPI, DTI, CFI and FISN, being used to identify, classify and describe financial and referential instruments.   

“Looking ahead to 2025, there will be further consultations in both the EU and UK on reference data, transparency and transaction reporting which will shape how the existing OTC derivative identifiers are used in both jurisdictions. The DSB expects the OTC ISIN to be modified and for identifiers to play an increasing role in regulation as use cases evolve. These activities will require continued collaboration with public and private sector stakeholders and other standards setting bodies.

With global UPI reporting, and implementation of UPI into additional jurisdictions scheduled throughout 2025, the impacts of regulators receiving reports and using reporting data for systemic risk monitoring will become more apparent. This will increase emphasis on data quality with the DSB looking to support authorities’ growing interest through taskforces and best practice guidance for the OTC derivative market. 

New jurisdictions coming online for UPI reporting, and general evolution of the OTC derivatives markets, is likely to lead to the DSB supporting new OTC derivative product and underlier requirements, with an increased interest in coverage of digital assets and other referential instruments, such as commodities. This will require focus to be placed on evolution and maintenance of classification standards, particularly CFI, to ensure developments are aligned with market practices and expectations. The DSB’s industry representation groups will remain actively involved in these activities.” – Emma Kalliomaki, Managing Director, ANNA and the Derivatives Service Bureau

Risk: Post-trade risk reduction and Basel III Updates

Kirston Winters, Head of Legal, Risk, Compliance and Government and Regulatory Affairs, OSTTRA

There has been progress in 2024 to establish an exemption around mandatory clearing of OTC swaps for post trade risk reduction, which is important from a risk and efficiency perspective. The action by the FCA to omit post trade risk reduction services (PTRRS) from DTO in September this year is positive, but more progress is needed in 2025.

Counterparty risk reduction, through portfolio rebalancing, has been conducted by risk reduction providers like OSTTRA for over 8 years, but it must work in a very specific way because of the mandatory clearing rules. The reality is that what the exemption is needed for is not to reduce risk. It’s about making it more efficient and expanding the number of firms participating by making the process less complex.

The market has moved towards swaptions as an alternative to interest rate swaps to manage uncleared exposure reduction. By using swaptions instead of swaps, you are creating a structure that adds layers of complexity that create barriers to many firms and are not in the spirit of the regulations. OSTTRA is supportive of clearing, which has been pivotal for reducing counterparty credit risk in financial markets. However, the clearing mandate as it is today does prevent bilateral risk from being managed in the most efficient way possible through swaps. So while the action by the FCA is promising, we will be working closely with the Bank of England and PRA to expand PTRRS exemption in 2025.

“In 2025, the continued global shift towards risk-free rates (RFRs), which is set to continue with PLN, ZAR and ILS, will remain an important regulatory development in derivatives markets. OSTTRA has been a leader in this shift to date, with record compression runs recently completed by OSTTRA triReduce for Mexican Peso (MXN) at CME Group’s CCP and cleared trade transitions supported by OSTTRA MarkitWire. This was as market participants intensified efforts to reduce their exposure to the 28-day TIIE ahead of the upcoming transition to the new F-TIIE reference rate at the end of December, and this engagement with multilateral compression and cleared trade transitions across all central counterparty clearinghouses will remain an important tactic for transitioning to new RFRs next year.

While there are many elements still to be confirmed, the Basel III updates will be an important topic in 2025. The confirmation of reduced capital requirements in the US and UK provides breathing room, but there will still be an increase in capital driving efforts to reduce the notional held in OTC derivatives. Crucially, for the G-SIBs, we are expecting more clarity on window dressing, which could require more regular calculation of G-SIB scores. If banks are required to calculate G-SIB scores on a weekly or daily basis, affected banks will need to put robust processes and tools in place that work during normal trading periods compared to the usual year-end timeframe which is much slower as traders close their books for the year. The investment in systems support needs to be balanced against the value to regulators.” – Kirston Winters, Head of Legal, Risk, Compliance and Government and Regulatory Affairs, OSTTRA