27 February 2013

Trade matching for Exchange-traded Derivatives: Lessons learned from equities

DerivSource's Ted Leveroni explores the importance of trade matching for exchange-traded derivatives amidst regulatory reform, market change and previous success in automating this process for other asset classes.

There are different parties communicating in a post-trade world; brokers, asset managers and exchanges are all communicating daily and the way to streamline communication is to agree on a standard. Once you have a standard workflow you can create a standard messaging convention/hub that will solve the problem when communicating with multiple entities. The real challenge is selling a standard when you are one of the early adopters. Firms want to stand on the outside of the pool and not jump in until they can quantify how much benefit they can get, yet it is difficult to recognise the benefit when building the community. Standardisation and automation will benefit all industry participants.

It is cheaper to live in an automated environment and currently there are real margin pressures on the brokers. While there is an initial implementation phase when adopting a new standard and automated operation, standardisation can save money and resources in the long run. Finding fails and correcting errors will be a more efficient and cost effective process for the broker community. And if they off load some of the operational burdens from their portals to a third party they don't have to deal with the cost of maintaining such processes.

In the post-trade space we will see a snowball effect, as clients come on and trade they are going to realise the benefits. Once the basic processes are standardised the new opportunities for efficiencies will emerge such as  commissions matching, and data cross referencing.   Automation of these aspects of the lifecycle will further reduce breaks, risk, and will make the entire process more efficient.   The key point is that once you adopt a standard you only need one solution to fix an industry problem and the value of the product will grow exponentially.

In general, I believe that in the ETD space we are going to see some significant increases in volumes due to futurisation of swaps and mandatory clearing of OTC derivatives. Lots of firms do not have swap clearing brokers and they don't want to incur margin and capital costs when trading OTC derivatives. Exchanges are launching futurised products and I think this is going to have an impact on the volumes. In the next 12-18 months you are going to see a lot of these products traded, and the increased volumes will exacerbate these issues and create further demands for a standardised process.

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