The buy side is a long way from an operational efficiency Nirvana when it comes to over-the-counter derivatives and operational data management. A recent survey finds that 82% of 135 North American executives polled are relying on error-prone workarounds for cleared and executed OTC trading. Another survey says firms are still battling data silos and data demands for regulatory compliance.
The OTC-oriented survey, led by investment management solutions vendor SimCorp, surveyed 84 North American-based capital markets firms, and finds them hobbled by legacy OTC derivatives processing platforms. The buy-side is leveraging legacy systems and creating workarounds for middle- and back-office operations. The respondents also confirmed that their legacy systems slow down their launches of new financial products.
In fact, 53% of respondents to the SimCorp survey say that with their incumbent systems they need at least two months to model and launch new derivatives products. Another 22% of firms say that they need a minimum of four months to ready new financial products.
The most disturbing finding of the survey found is that 4% (five to six major firms) are “entirely unable to launch new products using their current systems,” according to SimCorp officials. One-third of those surveyed add that the accuracy of client reports is compromised because of the incumbent systems and workarounds.
Interestingly, the SimCorp survey is in stark contrast to the Financial Stability Board’s new report that “substantial progress” has been made toward meeting the goals of OTC derivatives reforms set by G20 Leaders four years ago. Yet even the FSB says it would like to see more firms using centralized clearing facilities, exchanges and electronic trading platforms. The implication is that a larger than expected portion of the Great OTC reforms may be carried out via manual systems, including trading turrets, phone calls, sneaker-nets and faxes.
On the trade data management front, the survey conducted by data management services provider Fenergo and the Financial Information Management Association, finds that the top reference data management problem is “the continued existence of data silos, which ranked first and second in severity for 50% of respondents,” according to Fenergo. In addition, the survey finds that more than half of financial institutions, or 51%, report that sharing data among various parts of the organization “is difficult and requires manual effort for each sharing task, a percentage that has not improved since last year’s report.”
In addition to the data silo problem, more than one third, or 36% of respondents, see the data management demands of regulatory and compliance requirements as their top priority this year, according to “The 2013 Financial Data Management Benchmarking Report” that stems from the survey. The report cites the Dodd-Frank and European Market Infrastructure Regulation legislation, the CFTC and the legal entity identifier (LEI) push as the main regulatory drivers
So, other than running to vendors, consultants and happy hours for solace, what are firms doing to get around these stumbling blocks?
On the operational data management front, the Fenergo/FIMA survey finds that 15% of respondents have established the position of chief data officer and 34% of them say that they are leaning toward hiring such a person. Presumably, such an executive will help firms stay focused on the high-quality and accurate data that the regulators demand, and that can be easily shared and reused across the enterprise.
There is another ray of hope in that some firms apparently have found the right combination of right operations and systems.
The SimCorp OTC survey reports that 24% of those polled can have a new derivatives offering available within one month — a major advantage over those that take four times as long.
Lastly, while workaround patches, semi-automated and manual systems are far from optimal, they serve as a sign that the buy side is moving toward a new operational infrastructure and suffering its way to best practices that can handle the frightening new world of OTC derivatives and whatever else the industry and regulators throw at it.
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