The Derivative Landscape continues to change… but support is at hand

Who would have thought that the directive, initiated by the G20 in 2009, to introduce transparency and reduce risk in over the counter (OTC) derivatives, could have led to the level of confusion and uncertainty that it has.

Adam Gable – Product Director – Financial Crime, Treasury and Risk

The G20 addresses systemic risks

In response to concerns about systemic risks in OTC derivatives markets, G20 leaders agreed to a comprehensive reform agenda. It was agreed that largely standardized OTC derivatives contracts should be traded on electronic exchanges, and should be cleared centrally by Central Counterparty/Clearing Houses. These rules also state that trades and their daily valuation should be reported to authorized Trade Repositories and initial and variation margins should be collected and maintained. However, differing regulatory rules, models and competing Trade Repositories have led to a differing interpretation of these rules and therefore the associated data requirements.

It is accepted that measures to control and mitigate associated OTC risk are needed. Yet it is unlikely that anyone could have quite anticipated the fallout and confusion that has ensued following edicts from the likes of the Dodd Frank act in the US and EMIR in Europe.

New rules present new problems

This lack of clear direction, compounded by the disparity between different jurisdictions and trade repositories has led to an ever frustrating set of fluid rules and moving goalposts for banks to follow. The complexities of multiple data formats and disparities such as real-time reporting versus T+1, USI v UTI, and single sided against dual sided reporting are just a few of the challenges and points of fragmentation within this landscape.

Even the first round of reform, reporting to Trade Repositories, has proven problematic. Banks are struggling to interpret and understand these complex and fluid, requirements. In fact, in many cases, banks are still only able to provide the most basic reporting manually; creating business inefficiencies and opening the door to associated manual processing risks. There is a clear need for banks to review their operational models and look to technology to help navigate through such flux.

To address this issue, and the needs of banks trading in Europe to also report on Exchange Traded derivatives, Temenos has developed a new flexible module for T24 Treasury that includes a global reporting mechanism; OTC Clearing.

OTC Clearing – providing seamless reporting

This solution enables our clients to ensure full compliance by capturing all relevant data, employ hierarchical mechanics and generate industry standard references such as Unique Trade Identifier. The flexibility of this module overcomes the disparity of data requirements and enables users to achieve compliance across multiple regulatory jurisdictions.

A key benefit of OTC Clearing is derived through its integration with T24, enabling data to be seamlessly captured from deals generated across the bank, regardless of source.

Regulation creates complexity and cost for any business, banking sector regulation is arguably more complex than most and compounded further when the goalposts are continually moving. The importance of capturing and standardizing transaction data is therefore of paramount importance. Only when this is achieved, through solutions such as our OTC Clearing module, can banks establish a foundation to meet their regulatory obligations today as well as those in the future.

Adam Gable – Product Director – Financial Crime, Treasury and Risk