DerivSource spoke to Jim Bennett and Phillip Matricardi from Sapient Global Markets for an update on the evolution of the Clearing Connectivity Standard (CCS) and to explore what lies ahead for this OTC clearing standard in the coming year.
Q. Can you refresh our readers’ memories on how and why the push for this new standard began?
A. The idea for the creation of the Clearing Connectivity Standard (CCS) started within the custodian community where custodian banks observed that there was a lot of inconsistent data for central counterparty (CCP) trades and different messaging formats coming from Future Commission Merchants (FCMs) and direct clearers who were providing this information to their buy-side clients. This reconciliation headache with the mismatch of various messaging formats and data was only increasing already high operational costs and risk.
The standard was the idea of a core group of custodians, however Sapient, due to our relationships between the different industry players, quickly stepped in to help facilitate the creation of this standard to enable the initiative and move this forward. Initially, we focused on the US market mandatory clearing dates and specifically on CME Group and LCH.Clearnet products, which were 90% of the volume. At this time, we agreed on an initial standard and then approached the top ten largest clearers in the US market with the concept.
At the time, the FCMs were getting different RFPs and RFIs from their customers asking for different data so they were generally quick to endorse the CSS as they agreed a standard was necessary for efficiency. The first version of the standard was released and open to the market as of August 2012.
Following this milestone, Sapient approached the International Swaps and Derivatives Association (ISDA) to fund this initiative and move the standard forward with the help of program management, governance and industry oversight.
Q. Can you briefly explain how the custodians may conduct reconciliation today versus how it would be completed with the use of the new standard?
A. When reconciling margin calls on behalf of a client, custodians have to check the margin calls are accurate and compare this with other information received, which will come in various formats. Even the definition of the agreement terms will vary by firm. This is a very manual reconciliation task for all reporting parties.
Use of the CCS will simplify this process by integrating the standard formats established with data management systems to automate reconciliation at once and replace the manual reconciliation. Use of the CCS will greatly improve the entire process but also enhance the communication and reporting of cleared derivatives trades at a time when volumes will only increase.
Q. What is the next challenge you face in achieving momentum for the CCS? And are institutions well aware of the advantages of using this standard early on?
A. The challenge right now is getting everyone on the same page and gaining momentum. From a maturity point of view we are still finalizing the governance for it. Due to the fact that firms are spending their own capital, it is difficult to build these coding platforms when everyone is still trying to agree on the governance, however, progress is being made. Next up, we are rolling out CCS for different reporting phases in line with the clearing deadline under EMIR in Europe.
As for benefits achieved so far, it is difficult to compare the amount of work and risk CCS will reduce due to increased volumes of reconciliation following the regulatory change and CCP clearing start dates. Firms realize they don’t have the adequate systems in place to manage the spike in reconciliation and are therefore focused on trying to get ahead of the curve.
Q. Do you think you the standard has progressed more quickly in the current environment due to the regulatory pressures compared to if you had started this process several years ago?
A. Yes, the whole reason why we pushed CCS was because OTC clearing communication was relatively new to some and a large unknown which was being quickly identified as a risk and a cost. All types of financial institutions agreed that the standard was the right answer for now especially with ongoing regulatory reform and mandatory clearing specifically, acting as key catalysts for change.
Sell-side and buy-side firms are starting to realize that the standard is a necessary effort for dealing with clearing mandate and the additional processes required to support cleared derivatives volumes. Most financial institutions have made an adjustment to their infrastructure and systems to respond to new regulatory change however, those systems don’t have standards wrapped around them and so it is going to be challenging for those utility solutions with multiple connections to achieve a high level of automation and consistency. Smaller firms don’t have access to the same resources as larger institutions and as a result have different needs but will still benefit from the efficiency and consistency and thus reduce operational costs a standard would enable.
Q. The establishment of the CCS seems to have progressed fairly quickly. What are some of the lessons learned through the process you have followed thus far?
A. We really didn’t encounter any major problems because we approached this in a realistic and pragmatic way; we agreed to keep it tight and narrow initially with three custodians and together we moved forward. We had multiple checkpoints to validate the initiative and we questioned the propositions continuously. And we built it with multiple touch points and validations in the market and we continue to do that. With both the involvement of custodians and FCMs in a relatively open forum we were able to quickly thrash out what a consensus format would look like and to take the different methodologies into account. This early involvement of both sides of the industry helped immensely.
Q. What about customized reporting some FCMs and banks will offer clients? How does the CCS impact this process?
A. Being able to provide customized reporting is a real business differentiator for a firm, but maintaining a level of stability and organization whilst still adhering to a standard that can be automatically consumed by a large service provider is the challenge. FCMs are not going to give up producing custom reports, especially for their most valued clients. In some cases, FCMs view this as another custom format but because all the major custodian banks and service providers are consuming it, we think it is clear that it will be a win-win from their side. Maintaining that differentiated customized client experience is important, and we expect them to continue to do so.
Q. If you were to look back in a year, what would be the ideal scenario be for the standard in terms of progress achieved?
A. By this time next year we should have all the different reporting levels in place with live exchange data between member firms using the CCS format.* They may not all be ready as we keep adding new firms but those firms engaged now will hopefully implement the standard and any revisions to the format will be under the governance of the steering committee. The transition to FpML should be completed, although we do think the system will persist in CSV format. Many strategists at investment banks are starting to think now about how utilities could help reduce their costs and make their business model more economical. We think this is going to be more a 2014 evolution and you will see more standards with the market starting to look at more utilities to become more efficient and more transparent. These firms do compete with one another and that is the challenge for any standard getting them to discuss information but they all share common challenges and standards will reduce operational cost and risk in various areas of the business.
*An update as of 1/15/14: the first two CCS reports, Summary and Position & Trade, have been finalized and locked by the ISDA Steering Committee. The next report, Collateral Holdings, should be approved in the next meeting. On June 10th, 2013, 4 of the largest Clearing Brokers and the largest 4 Custodian banks announced or confirmed their support of the standard in a press release. Five major Clearing Brokers/FCMs are currently in production with the CCS Summary report, and three more are producing test reports. Eight major Custodians/Service Providers are receiving client data in form of the CCS Summary Report. The same firms on both sides are currently working to get the Position & Trade file into production. We anticipate that the remaining CCS reports for cleared OTC products will be approved and locked by the end of Q3 2014.
