Celent Report: Price Tag for OTC Collateral Management Reform to Hit $53 Billion
Cubillas Ding, analyst, Celent
As derivatives clearing and collateralization reforms get underway, the financial services industry will spend more than $53 billion in infrastructure and technology investments to make their systems more operationally efficient, according to a new report from market research firm Celent.“We expect it will cost the financial industry in excess of $53bn in infrastructure and technology investments to upgrade to new systems, source operational capability externally, maintain multiple legacy applications, and address inefficiencies in a mixed clearing and collateralization environment,” says Cubillas Ding, an analyst with Celent.
Overall, firms are putting “a significant focus” on collateral efficiency—67%—and operational efficiency—62%, according the survey, sponsored by Omgeo. This represents an urgent need to improve the efficiency of margining processes.
The report, “Maximizing Collateral Advantage, a Buy-Side Survey of Business and Operational Strategies,” finds that investment managers, hedge funds and pension funds are beginning to feel the impacts of over-the-counter (OTC) derivatives reform on their business and operational strategies:
- The speed of the new regulations is creating “operational challenges for buy side firms, with over 90% of firms stating strong pressures from aggressive regulatory changes;
- ”Firms will have to cope with “an anticipated 100–150% growth in margin call traffic, as predicted by respondents.” This operational explosion in margin calls will have repercussions for operational capacity, resources, and a firm’s flexibility to manage collateral efficiently in the new market environment. “Our study results suggest that even a 50% margin call increase would be problematic for certain firms and will push already tight operational resources to a breaking point;”
- Collateralization costs are likely to go up by 20% because of additional requirements for initial margins; credit and/or opportunity costs that come with sourcing for eligible (higher quality) collateral. Firms also have to take into account the operational infrastructure and headcount to manage stringent and complex requirements associated with new derivatives regimes;
- Despite these pressing challenges, about half of the respondents —48%—still must finish operational preparations to meet regulatory requirements or margin call increases. Even the firms that are addressing these challenges are reporting gaps in their coverage. Some firms are citing margin call inefficiencies in operations—43%—and limitations with incumbent systems—38%—as “significant challenges.”
How firms manage collateral for their cleared and executed OTC derivatives will become “the top competitive advantage going forward and this will significantly affect the way firms go to market,” according to the report.
Capital Dynamics to Deploy Fund Management Platform in September
Fund of funds manager Capital Dynamics will be deploying the fund management and reporting software product FrontInvest from vendor eFront, confirms George Georgiou, chief operating officer (COO) of the Swiss firm known for its private equity and clean energy infrastructure investments.
Capital Dynamics screened “the industry’s top 10 fund and deal management solutions,” says Georgiou, declining to name the contenders. The firm then conducted in-depth due diligence to generate a short list of three providers, “of which eFront was ultimately selected.”
The targeted delivery of the final system is by early September, which will allow the firm to test through the end of the year and then begin a full parallel run in January, 2014, Georgiou says. “The solution will allow Capital Dynamics to automate and standardize processes and controls across its back office capabilities, including accounting, monitoring and reporting,” he says.
The deployment is intended to streamline Capital Dynamics’ back office processes and help the firm make its work flow more efficient while increasing productivity, Georgiou says. “With this new software, Capital Dynamics aims to enhance the overall client experience through customizable solutions and tailored, bespoke services,” he says.
Officials at eFront say they will continue to work closely with Capital Dynamics to identify additional capabilities that will make the software products even more useful to Capital Dynamics
FIXatdl Gains Ground via Nordea Investment Management
Nordea Investment Management has gone live with new component of SimCorp Dimension’s order management software that supports industry standard FIX Algorithmic trading definition language (FIXatdl) files that can be used in post-trade transaction cost analysis and other middle and back office related processes, officials say.
The FIXatdl uses XML to create graphical user interfaces for electronic trading. It is built upon the FIX Protocol and allows firms to receive electronic orders with specific instructions. FIXatdl-based orders can then be transmitted from trading systems via FIX, officials say. All FIX versions are supported and firms do not need to adjust their underlying FIX infrastructures.
Nordea officials say that 10 of its brokers are using this function to simplify the asset manager’s trading environment and bring a new efficiency to trading operations.
“Placing trades via FIX to execute broker algos directly from the SimCorp Dimension Order Manager blotter is quick and easy,” says Per Møller, global head of trading at Nordea Investment Management in a prepared statement. “We now have Tier-1 broker strategies embedded into our core STP order execution and post-trade processes, so there is no real need for other equity EMSs. Our traders can effectively execute increasing volumes this way, leaving them more time to work illiquid or special stocks.” The brokers currently live with Nordea Investment Management include: BofA Merrill Lynch; Barclays; Deutsche Bank; Goldman Sachs; JP Morgan; Knight Capital; Morgan Stanley; Sanford Bernstein; and UBS.
The FIXatdl-based orders and strategies are stored within SimCorp Dimension allowing for an audit trail that aids middle and back office processes.
In addition, SimCorp officials say the testing of FIXatdl-based processes and initial live usages have been via the London Stock Exchange FIX Gateway, the LSE Hub.
“The broker strategies involved have been individually tested by SimCorp and the relevant brokers across the LSE Hub to ensure a rapid implementation and lower ongoing costs for our mutual clients,” says Katherine Lachelin, product manager of the LSE Hub. “We are pleased to see the first client live.”
Scivantage Launches Real-Time Database for CBR
Brokerage, tax and portfolio reporting software vendor Scivantage recently released an onsite database of real-time cost basis data Maxit RDS that targets clients’ tax lot data needs, officials say.
An add-on service of Maxit Data Delivery Services, Maxit RDS is a replicated data warehouse designed to reduce manual processes and end ongoing reconciliation between the Maxit database and internal client systems, officials say. The tax lot data in RDS is automatically updated and reconciled so that clients can have direct access to the information they need for internal and external services such as client reporting, statements, management dashboards, reference and other operational processes.
“It has been extremely valuable to have unencumbered access to the data that we already collect in Maxit,” said Jennifer Frenck, a software engineering manager at Raymond James in a prepared statement. “With RDS, we now have direct access to our database, which significantly enhances our ability to independently use the tax lot data as needed to support internal goals and objectives.” The improvements in accuracy and timeliness of updates have led to time and cost savings, Frenck adds.
Broadridge Launches SWIFT GETC App
Sell-side institutional brokers will be able offer fund managers automated post-trade confirmations and affirmations for trade allocations via Broadridge Financial Solutions recently launched solution for SWIFT Global Electronic Trade Confirmation (GETC), say officials.
The Broadridge solution supports SWIFT GETC messages (MT515, MT509 and MT517) on a global basis, and provides operational control through full transparency of the message generation, flows and statuses, officials say. Once buy-side clients receive the affirmation message (MT517), a SWIFT MT54X settlement message is released, allowing clients to manage and control their post-trade activities.
“We have worked closely with SWIFT to ensure support for the mutual client base interested in GETC,” says Phil Dobson, director, strategy and product management for Broadridge, in a prepared statement. “The proposed introduction of shortened settlement cycles in some markets in 2014 will put even greater emphasis on timely and efficient confirmation and allocation processes.”
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