Technology and Financial Reform: Data, Derivatives and Decision Making

Financial reform is ironically complex. The Dodd-Frank Act (DFA), the European Market Infrastructure Regulation (EMIR) and other new rules came into being to make the market more open and easier to manage. By pulling back the covers on just one of the dozens of functional areas set to be changed, even something as seemingly mundane as identifier codes, the complexity found within is astonishing. It might be cliché to say current financial reform efforts amount to a massive overhaul of the entire financial system, but it is true.

There is a huge difference between today’s reform and the reform that occurred after the Great Depression, however: data. Data existed in the 1930s, but it was measured in pages rather than petabytes, and was transported via the US mail rather than messaging middleware. This electronification will continue to be a blessing and a curse. Data is what will bring transparency to the market, but the sheer magnitude of data needed to operate in financial markets today is in large part what contributed to the complexity and need for transparency in the first place.

OTC derivatives market reform is at the center of this data challenge. Electronic trading, clearing, reporting, risk management and numerous other reform-mandated processes will produce and consume data, the likes of which the swaps market has never seen. Furthermore, this production and consumption will happen much more rapidly than it has in the past. Many don’t believe that counting microseconds will be necessary in the swaps market. But now that financial law is requesting that things happen “as soon as technologically possible,” latency can no longer be ignored.

To that end, bringing the data mart concept to the front office is key. An infrastructure that can pull in and normalize the most relevant data in real time and then distribute it out to the proper endpoints will make real-time margin calculations and cross-product risk management possible. Thankfully, this technology exists. The challenge for financial services firms will be to create a best-of-breed solution based on a combination of in-house and third-party technology to solve the vast array of data challenges.

Ultimately reform will create opportunities and innovation. We’ll spend billions to get there, but rest assured that the expenditure will be recouped in the newly minted electronic swaps market.

The TABB Group Vision Note Technology and Financial Reform: Data, Derivatives and Decision Making examines the technological challenges and opportunities presented by global OTC derivatives reform. Based on conversations top-tier swaps dealers, buy-side firms, exchanges, clearinghouses and swap-execution facilities the study also examines the primary drivers behind the impending data explosion, related business concerns and the various approaches being taken by the market to adapt.