As the EMIR mandatory clearing of interest rate swaps kicks in for Europe’s biggest firms), Neill Vanlint of GoldenSource and Nick Newport of InteDelta explore the operational challenges facing CCPs and argue that an industrial revolution is called for to prevent operational risk seeping into the system.
The CCP Landscape
The CCP landscape is at an inflection point. Although it’s evolved hugely over the six short years since its establishment, the industry will see a major shift in requirements over the next 6-18 months. EMIR’s mandatory clearing of interest rate swaps is the latest of many deadlines coming thick and fast after a series of delays, and as a result, volumes are set to increase dramatically in the coming months. That will bring challenge, but also opportunity for those who are well-positioned to take advantage of it. What has, to date, been something of a cottage industry is set for an industrial revolution.
CCPs have not traditionally had the same tailor-made technology platforms as the like of the investment banks and brokers.
The challenge is, the CCPs’ requirements are actually quite different to that of an investment bank on-boarding a client. Not only do they have to manage their clearing members, but also take account of their members’ clients, which could mean hundreds or even thousands of accounts: an explosion of counterparty data to manage.
And it’s not just counterparty data. Security master, trading, risk and derived data are all part of the picture. Consider collateral management. Client margin calculations and associated stress tests. New risk management methods. On-the-fly valuations of swaps to set the market price. It’s a paradigm shift in the breadth of data that needs to be managed and also the volumes of data that will need to be processed in near-real time.
The importance of multi-domain data management and ensuring data quality via robust capability is now equally incumbent on the CCPs as well as the brokers and other trading members they interact with.
State of the CCP
Of course some CCPs are further down the road than others. But the lack of purpose-built systems has resulted in a myriad different approaches, typically including a considerable number of manual processes or patched-together systems, as CCPs have tried to bend the often-rigid IB workflows to meet their needs. For many, it was a case of getting the infrastructure in place to get going, and then to keep pace with requirements. The issue is that the requirements are about to change out of all recognition.
Add to that the fragmented nature of the CCP market currently, and the lack of interoperability that still exists, despite some efforts to standardise, and a potentially messy picture emerges. Given that the prime role of CCPs is to reduce systemic risk, the prospect of significant operational risk in the system will set alarm bells ringing at the highest level.
As CCPs take on a critical role in the trading ecosystem, they must be bastions of operational excellence that can scale fast.
And of course quite apart from the risk element, it’s a fiercely competitive environment. With the floodgates about to open on the volumes, CCPs will be jockeying for position, and investors will be looking for growth in market share. The ability to maintain a seamless customer experience as they scale may prove make or break for some.
Looking to the future
Out with the manual processes and system workarounds. The new era of CCPs will be defined by scalable, purpose-built automated systems underpinned by sophisticated and robust data management infrastructure. The industrial revolution is coming but which CCPs will be best placed to take advantage?
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