Derivative Reform and Brave New Platforms

October 2nd, 2015

Derivatives and Regulation

Derivatives can be utilized as a key tool to protect against risks that are inherent to business. Derivatives allow financial institutions to hedge their exposure to credit risk, which helps them expand their lending and investment capabilities, fostering economic growth.

Examples of derivatives which are subject to new regulation under Title VII of the Dodd-Frank Act include interest rate, credit default and equity swaps, to name a few. Dodd-Frank’s Title VII mandates regulators, including the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC), to undertake rulemakings designed to meet G20 objectives of increasing transparency and reducing systemic risk in the derivative markets, including:

  • Reporting swap transactions to a swap data repository;
  • Clearing sufficiently liquid and standardized swaps on central counterparties;
  • Where appropriate, trading standardized swaps on trading platforms; and
  • Setting higher capital and minimum margin requirements for uncleared swaps.
  • The CFTC has completed most of its Title VII mandated rulemakings, establishing a regime of regulatory oversight for many new entities, including swap intermediaries known as “Swap Dealers” and “Major Swap Participants” (MSPs), as wells as clearing houses and trading platforms.

    Under this new regime, sufficiently liquid and standardized derivatives transactions are required to be centrally cleared, and the most liquid of those are required to be executed on platforms.

    Clearing Platform and Integration

    Markit’s Trade Manager offers buy-side participants a single platform for addressing electronic confirmation, clearing and electronically ineligible (‘paper’) trades. Buy-side firms can submit trades and track updates in real-time. Customers can upload trades in Excel format or via the Client API in a real-time FpML API. Our client, utilizing CRD, wanted to send SEF executed IRS and OIS trades to Trade manager.

    Swap Execution Facility (SEF) is a platform for swap trading regulated by the Securities and Exchange Commission and the Commodity Futures Trading Commission that provides pre-trade information (bids and offers) and an execution mechanism for swap transactions among eligible participants. These transactions are usually sent to the LCH (London Clearing House) or CME (CME Group) for clearing.

    There is a challenge when implementing Trade Manager with CRD. Charles River has an interface with Trade Manager; however, the interface was created as a back office function. To support straight through processing, the challenge is to have trades match and clear in Trade Manager before sending it to the back office.

    The standard CRD interface was leveraged and customized to send the trade to Trade Manager once the trade is completely executed, prior to sending to the back office. This interface created an Excel CSV file that was sent via SFTP and automatically injected into Trade Manager. The status’ from Trade Manager are sent to CRD every 15 minutes (not real-time) and are visible on the trade blotter. Once the trade has reached ‘cleared’ status, the trade is automatically sent to accounting. You can see real-time status’ utilizing Trade Manager accessed via a web browser.

    Because of CRDs incredible flexibility we were able to leverage and customize the existing interface to accomplished clearing the trade prior to it being delivered to the back office. This eliminated the need for cancel and corrections due to unmatched trades, cutting down on cost and creating a straight through process for SEF executed IRS and OIS trades.

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