In a recent DerivSource webinar, leading derivatives operational experts collectively shared their view on what market participants should be focused on in 2015 in terms of investment and operational change. Read below the views of your peers on what they believe operations managers should be focusing on in the coming year.
Margin Efficiency & System Readiness for New Cleared Products
Diana Shapiro, Vice President, Futures, Clearing and Collateral Core Clearing Product Development at Citi in the U.S.
High-quality, liquid collateral is going to become scarcer as additional margin rules come into effect for derivatives. At the same time, capital costs are going to constrain balance sheets—and as a result, there are going to be fewer securities on loan. Market participants need to have smart back-office systems, and partner with the right institutions, so that they are efficiently deploying their assets. They are also going to want to look at different cross-product margin solutions to reduce their margin requirements—whether that is a bilateral product margin solution, which we here at Citi offer, or whether it’s investigating the clearinghouse cross-product margin solutions to reduce their overall requirements. Netting and compression are also key in order to reduce capital costs as the new capital framework comes into play.
In addition, the new regulatory mandates are going to push different products into clearing: rates and credit clearing will be mandated in Europe next year; the uncleared margin rules will go into effect in the US; CME is currently implementing swaptions; non-deliverable forwards (NDFs) are being contemplated in Europe and the US; and LCH.Clearnet is looking at inflation swaps. In order to support these changes, firms will have to strategically invest in flexible systems that are global in nature that can process all the different transaction types while taking in consideration regional regulatory nuances.
4 Priorities: Understanding Cost, Collateral Optimization, System Consolidation & Keeping to your Core Business
John Omahen, Vice President, Post Trade Derivatives, SunGard Capital Markets in the U.S.:
There are four different but related priorities. First and foremost, for those firms that haven’t done it already, they need to make an investment in understanding their true costs. Financial institutions can see top line costs, but most don’t necessary know how they got there. Having that information and those metrics around where the business is losing money, and where it is making money, is really essential for a firm to make good decisions. Unfortunately, getting that data out of many of these systems is very difficult without some investment.
The next investment firms need to make is in new functionality around collateral optimization and cross margining. These are services that buy-side firms are going to be looking for more and more, with the phasing in of the mandatory clearing and bilateral margin requirements.
The third area for investment is system consolidation—cleaning up and simplifying the architecture that supports their operations.
And then finally, firms should invest in analyzing their core business—understanding which pieces they really should be involved in, and they should be investing in to differentiate themselves, and which parts of their business do not provide any competitive differentiation and could potentially be handled by an external service provider.
Considerations for Market Consolidation & Overlaying Systems Now
Sanjay Kannambadi, Director, Deloitte Consulting in the U.S.:
Priorities for 2015 include getting a good understanding of cost because understanding costs, and how their clients are consuming them, will give firms a better view into product profitability, as well as client and relationship profitability, and the cost of capital, which has to be included in that whole equation. Cost and the cost of capital going to be very important for not only the operations managers, but those who are managing the business in the front office, and the operations and technology departments as well.
Buy-side and sell-side firms need to start thinking about playbooks for scenarios where consolidation in the marketplace may impact their existing relationships—whether it’s with futures commission merchants (FCMs), swap execution facilities (SEFs), or other access points in the marketplace. They need to think about what they will do if there is a consolidation or exit of market participants that they have been dealing with. That is becoming very important from a top-of-the-house risk management perspective, and even in certain cases the regulatory side of the equation. Firms must focus on putting together a playbook, and not wait until the last minute, because they don’t have many choices left at that point, if at all.
From an operational perspective, the focus isn’t just on the consolidation of systems—although firms should plan for this. In the near term, market participants need to focus on overlaying platforms and solutions across their entire individual silo infrastructure, so that they can actually pull data from those silos and convert it into information that is required for the business. Firms should not wait for consolidation to happen before doing this. They have to make a start now as it takes quite a while to complete.
Looking ahead, change is a given and it is not going away. As an industry we have to live with this change and focus on understanding the impact on business so we can adapt accordingly and quickly.
