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The key is
to establish a
single source
of clean data
for all nancial
information
shared.
Data
management
challenges require
rms to maintain a
universal clarity in
order to transact,
manage, and
survive in todays
dynamic data
landscape.
The right
data will prove
to be essential in
conquering the
new collateral
problem.
The best
response to these
challenges is a front-
to-back IT solution
that covers the
entire value chain of
execution, clearing
and post-trade
processing of OTC
derivatives.
Firms need
data to underpin
securities lending
for collateral
purposes and for
repo market access
with the attendant
funding and haircut
treatments.
As the
new world of
derivatives trading
takes shape, asset
managers, FCMs,
CCPs, SDRs and
custodians need
a reporting and
communication
standard for
their swaps
transactions.
Harbingers of Hope
The second decade of the 21st century for
the global nancial services industry should
not be known solely for a wave of complex
nancial rules, regulations and guidelines.
The regulatory overhaul has also spurred
innovation in the form of a new standard to
help with clearing links, the emergence of
central counterparty clearinghouse (CCP)
providers and advances in STP.
As the new world of derivatives trading
takes shape, asset managers, FCMs, CCPs,
SDRs and custodians need a reporting and
communication standard for their swaps
transactions. In short, they need to simplify
integration with data systems, and automate
reconciliation in order to make clearing and
communications more concise and efcient.
The Clearing Connectivity Standard (CCS) is
being offered as a new industry-led reporting
and communication benchmark for OTC
derivatives. The CCS effort targets buy-side
rms by offering to automate many forms of
regulatory-mandated reporting, including
splitting margin payments to CCPs.
The benets of CCS are connectivity, the
netting of positions, and recording data
for other uses. The CCS push will include
functionality to separate payments for initial
margin, variation margin and commissions.
In fact, they can be grouped together and
netted off, or paid separately via CCS. In
other words, a buy-side rm with multiple
CCP accounts will be able to automate the
separation of payments at the account level.
The absence of a formal standard for
formatting or transmitting data between
entities can delay onboarding to SDRs.
Without a standard, rms face increased
operational risk, costly interface development
and maintenance issues with each custodian.
However, CCS is gaining traction as a standard
for the nancial industry it has been well
received by the International Swaps and
Derivatives Association (ISDA) and Securities
Industry and Financial Markets Association
(SIFMA).
Five of the largest clearing brokers in the U.S.
Bank of America, Merrill Lynch, Barclays,
JPMorgan, and UBS have thrown their
support behind CCS. ISDA ofcials have
also met with representatives from Eurex,
Intercontinental Exchange (ICE), Singapore
Exchange, and the Tokyo Stock Exchange to
garner further support.
The exibility of CCS also enables it to adapt
to the future needs of ongoing regulatory
reform. For instance, CCS will be moving away
from its comma-separated values (CSV) le
format to the XML-based industry standard
Financial Products Markup Language (FpML).
The FpML implementation will allow CCS to
be used widely across the Internet.
May 2014 - White Paper #11 Page 4
Single Source of Clean Data: Modern Data Management OpenLink Insights
Ancillary
Services
Back Ofce
Asset
Servicing/
Custody
Pre-Trade
Trade
Execution
Middle
Ofce
Front-to-Back
OTC Processing
FIGURE 2:
Transaction Lifecycle Processes
What is a CCP?
Overseen by clearinghouses, CCPs are
intended to bring a new transparency to
derivatives trading. A CCP interposes itself
between the original counterparties to a
trade by becoming a seller to every buyer
and a buyer to every seller via novation. This
can help reduce counterparty credit risk and
helps ensure that all information about a trade
is centralized. In other words, a CCP provides
a golden copy of data to all parties that
should be privy to the information.
CCPs are structured to fortify the contractual
obligations embedded in the derivatives
positions. CCPs are used to manage and
mitigate the credit risk of counterparties
during the lifetime of a derivatives contract.
For instance, the CCP calculates the change
in value of the positions of its members
on a regular basis in order to determine
the collateral required to meet margin
requirements.
What is STP?
STP is the total automation of the securities-
trading process, end-to-end, from trade order
to settlement (see gure 3). The goal of STP is
an impeccable, automated electronic transfer
of identical information to all parties in as
close to real-time as possible. STP requires
automated workows, from the front-ofce,
all the way to the back-ofce without manual
intervention.
The Upside of STP:
Eliminates the re-entry of OTC derivative
trade information after the transaction has
entered the workow.
Provides automatic links and paperless
processing, from front-to-back, regardless
of the parties involved and/or their
geographic locations.
Automates workfow in order to facilitate
transaction monitoring and exception
alerts.
Applies manual prevention or data
processing on an exceptional basis.
Provides an absolute connection between
external partners involved in a nancial
process including trading platforms,
clearinghouses, conrmation platforms
and other information providers.
Reduces operational risk via enhanced
controls, and minimized transaction costs.
Second, the increasing commoditization
of nancial products within the industry
is leading to decreasing prot margins.
Maintaining the prot level will depend on
cost reductions that can be achieved via the
operational efciencies of STP.
STP could play a vital role in helping rms
cope with the regulatory environment by
facilitating the amalgamation of market
information. This would involve all parties
such as traders, operations staff, accountants,
and corporate nance professionals to source
for the enterprise the cheapest collateral and
monitor price uctuations in the respective
portfolio positions. This helps build the case
for the advantages of STP, including lower
transaction costs and higher prot levels.
May 2014 - White Paper #11 Page 5
Single Source of Clean Data: Modern Data Management OpenLink Insights
A new mode of
data management
is taking root in
this new regulatory
regime.
Market
participants lack the
ability to value OTC
products and the
associated collateral
in a timely and
reliable manner.
IT systems
that are able to
handle todays
requirements are
not necessarily
suited for the
regulatory
guidances and
clarications that
are likely to come
over the next six
months.
STP can
provide a trading
enterprise with
a sole vantage
point for all
securities.
A new
dynamic of data
management
is crucial to
efcient collateral
management.
Conclusion
Overhauling the OTC marketplace is required
in order to replace manual intervention in
derivatives trade processing. Departmental
heads at trading enterprises are pushing
vendors and standards bodies for a universal
view of balance sheets at rms. All the while,
the amount of global high quality collateral is
limited due to regulatory requirements (see
gure 4).
A new dynamic of data management is crucial
to efcient collateral management and a real-
time, holistic view of data streaming from the
front-ofce to the back-ofce. The challenges
of systematically calculating collateral
positions and creating the single source of
truth have become increasingly more difcult
as the number of disparate data points
multiply at an exponential rate. STP and CCPs
can help rms address these difculties.
STP can provide a trading enterprise with
a sole vantage point for all securities. CCPs
centralize the settlement process and
produce margin requirements that change
according to portfolio values on an intraday
basis. In addition, breakthroughs such as the
Clearing Connectivity Standard will move
the industry closer to 100% automation and
collateral maximization.
Nevertheless, data management issues still
persist in the OTC marketplace. There is no
standard for OTC derivative categorization.
Valuation methods differ among parties.
Some trade processes are prone to human
error and could benet from automation.
Ultimately, much of the forward progress
is likely to be rocky because of an ongoing
regulatory reform process. Despite the
uneven progress the industry may take,
trading enterprises need to stay focused
on the vital need to provide uniform data
management for derivatives transactions.
Single Source of Clean Data: Modern Data Management OpenLink Insights
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