OTC Derivatives Clearing Technology: Bringing the Back Office to the Forefront

By mandating the clearing of OTC derivatives, global regulators have, with the stroke of a pen, started a technology revolution. Current clearing infrastructures are neither scalable nor flexible enough to handle the changes that are coming. This fact is driving a wholesale change from overnight (or longer) processing to near real-time clearing. These changes will not come cheap. The progression will take years, but it is now inevitable.

Anticipating an increase in transaction volumes is a key component to the clearing technology roadmap. Using listed derivatives markets as a guide, TABB Group estimates show that transaction volumes could increase twentyfold, and market data volumes could increase three to four times above current levels, as trading and clearing mandates are implemented.

As such, both dealers and clearinghouses need to ensure that every step in the trading workflow is capable of handling this uptick in flow. After all, an infrastructure is only as good as its weakest link. If a single component gets choked up, the whole system fails. And although analysis tells us a twentyfold increase in transaction volume is likely, any number of factors could change that number dramatically. That means not only must clearing infrastructures be scaled up, but also upgraded in such a way that they can quickly scale further if transaction growth is higher than expected.

This study, based on conversations with swaps dealers, clearinghouses, technology providers and buy side traders discusses:

p the confluence of factors that allowed current clearing technology to fall behind the curve;
p the impact new OTC derivative regulations will have on clearing technology for both sell side firms and clearinghouses;
p the cost of implementing the technology needed to handle real-time clearing and intra-day margin calls;
p and presents a view of the new clearing workflow.

Real-time clearing of a broad range of OTC products will happen. Market participants and regulators demand it, and innovative technologists will guarantee it. These improvements will come in phases, however, paralleling the regulatory rollout and growth in clearing volumes. Thankfully the first phases are already underway, and both clearinghouses and dealers know that the winners will be those who can both consume and disseminate data elements critical to trading, clearing and reporting in the least amount of time. Trading technology is cool, but clearing technology is better—who would have thought we’d ever see that day?