Swap reporting costs drive industry shift

16 March 2016 By Mike Kentz

The derivatives industry has begun to step out of the compliance phase that has dominated for the last five years post-Dodd-Frank, and into a consolidation and inefficiency-reduction phase now that the costs of regulation are playing themselves out.

Market participants lobbied heavily against the possibility of different frameworks for the reporting of derivatives transactions across borders, but failed to attain the substantive changes they desired. Now, the cost of submitting trades through multiple reporting lines has begun to bite – and industry members are turning their focus on eliminating inefficiencies through the use of technology. 

“When I talk to my programmers and explain what we have to do differently in Singapore, the US, and Europe, their eyes roll back in their head,” said Robert Lazarus, director of global derivatives compliance at Bunge, on a panel at the Futures Industry Association’s Annual Conference in Boca Raton yesterday. 

“[Reporting] is a perfect example of the inefficiencies we are dealing with, and as we try to get up to speed there’s going to be more and more regulations [across borders] and more and more disparity. If we do look towards new technology to fix that and say ‘this trading line goes here and this line goes here’ – that could really help us.” 

Industry sources say reporting trading data to the Depository Trust and Clearing Corporation – the biggest global derivatives data repository – can cost between US$2.5–$5m for a buyside firm per product, per jurisdiction. That would include all-in integration costs associated with technology, operations, and regulatory compliance costs – on top of fees. 

With operational inefficiencies taking centre stage at one of the derivatives industry’s biggest conferences of the year, CME Group – which operates a network of trade repositories – announced an agreement with post-trade processing firm truePTS on Wednesday. 

The firm will integrate truePTS’ application program interface into its network of repositories that operate in the US, EU, Canada, Singapore, Australia, Hong Kong and Japan – to try and reduce costs for clients that currently connect with each repository separately. 

truePTS – a spin-off of swap execution facility trueEX – will mitigate the differences across the regionally different compliance representations, allowing clients to connect only once in order to satisfy their global reporting needs. 

“In essence, [this agreement] is an industry reboot of the reporting process, for the benefit of both regulators and all industry participants,” said Sunil Hirani, interim CEO of truePTS, in a statement. 

The agreement could bring major cost reductions as well in that truePTS offers allocations and average pricing services on the pre-trade side. Participants are hoping end-to-end systems will eventually be created that link pre- and post-trade efficiencies together. 

“My pipe dream is that we get integrated technology not only on the back-end but also on the front-end,” said Lazarus. “That would eliminate 80% of the challenge we’re facing in terms of operational costs and compliance right there.” 

Shift in tone 

The CME-truePTS agreement could be a step in a positive direction for the industry – which has been lamenting the painful effects of Dodd-Frank and Basel III capital rules for several years. 

The industry conference in Boca highlighted a possible shift in tone, with technological innovation and the reduction of operational inefficiencies now the main focus. 

The market is still operating with legacy technologies that do not fit the current paradigm of a newly-regulated marketplace, they say. Participants are now focusing on technological solutions to the problems rather than continuing to pine for regulatory roll-backs that seem unlikely to come. 

“One of the themes we think we’ll see is that there will be a convergence around firms like ours that have had the opportunity to create wholesale market-making businesses without the burden of legacy systems and customers,” said Doug Cifu, CEO of Virtu Financial. 

“That has allowed us and others to create efficient infrastructures that enable both the market access, risk management, and post-trade management pieces together in an efficient manner.” 

Cifu said one multinational bank is already utilising Virtu’s order and risk management systems to access currency markets.

And building on the theme, market participants offered high hopes that blockchain technology will eliminate many of the redundant post-trade settlement processes and costs that currently exist. 

“Banks have no choice but to be anything but efficient now because of regulations, and they have a lot of legacy infrastructure that’s keeping costs high,” said David Rutter, CEO of R3 CEV, a blockchain-focused technology consortium looking to implement new technologies into the financial services sector. 

“A lot of the market still relies on third-party administrators, faxes, emails…if we could comfortably push that data to a cloud and secure it cryptographically, a lot of the costs associated with those processes could potentially go away.” 

ICAP on Tuesday announced the completion of its own blockchain proof of technology through its Post Trade Risk and Information unit as