For the second installment in a series on predictions, FTF News reviews the ISDA CEO’s efforts to bring more automation to derivatives processing.
(Editor’s Note: In a look to derivative processing in 2018, FTF News reports upon the remarks of the CEO of International Swaps and Derivatives Association).
Although not making specific predictions, Scott O’Malia, CEO for ISDA, on Nov. 30, laid out a blueprint for overhauling derivatives processing that could gather steam in 2018.
Speaking at ISDA’s “Technology & Standards: Unlocking Value in Derivatives Markets” in London, O’Malia says that the derivatives industry is plagued by manual systems that are impossible to interoperate. The goal of the conference and ISDA is to “transform our market to make it more efficient, more automated, and integrated with cutting-edge technology such as distributed ledger.”
One of the first steps toward this change is the “ISDA Common Domain Model,” which is outlined in a video via YouTube.
“Every person sitting here today, whatever their role in the derivatives market – trading or clearing, buy side or sell side, trade reporting or trade execution – is linked together by infrastructure. These are the basic, vital processes that our market relies on – the pipework that connects everything together,” O’Malia says.
“It’s long past time to admit that this infrastructure is no longer fit for purpose. Yes, our markets are safer and more resilient since the crisis as a result of regulatory reform. But, as the video showed, the underlying process of managing a trade through its life is complex, disjointed and manually intensive,” he says.
The process for overhauling derivatives processing will involve standards for data and processes, O’Malia says. “The first step on this journey begins with standards – specifically, data and process standards that form the foundation of how we execute trades, manage risk and meet regulatory requirements,” he says.
The next major step is timing.
“We’ve spent the past eight years developing and implementing a whole new regulatory paradigm. Today, clearing, compression, margining and reporting are all common. Many firms have simply been focused on meeting the evolving regulatory mandates, but now we’re at the end of the implementation effort, we can take a comprehensive view across the market and think about the future,” O’Malia says.
The next major step is to build a coalition around industry standards, O’Malia says. “Just last month [October 2017], we published a conceptual design definition for CDM version 1.0. We’ve received very useful feedback from right across the market so far, and we’ll continue to engage with the industry right through the process. As a next step, we’ve also issued an RFQ for the development of a digital version of the CDM. As part of that, we expect to have a version that firms can use to run proof of concepts in the early part of next year ,” O’Malia says.
The high costs of inefficiency and tighter bottom lines are compelling reasons to start to make these changes in 2018, O’Malia says. “But the question is, can we afford not to do this?” he asks. “Post-trade costs now make up a large slug of investment bank expenditure — between 15 percent and 20 percent, according to Boston Consulting Group. Across the industry, sales and trading IT budgets in fixed income, credit and commodities have nearly doubled since 2012.”
These factors are draining resources at a time of rising capital requirements, tighter margins and volatile profitability, O’Malia says.
“That’s unlikely to change any time soon,” O’Malia continues. “In fact, new capital requirements like the Fundamental Review of the Trading Book [FRTB] will require banks to put aside even more capital. Banks are therefore under significant pressure to become more efficient — they can’t afford to have any drag from unnecessary cost burdens.”