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Are You Stretching Your Swaps Infrastructures Too Far?

| FinReg

By OpenLink

Originally published on TABB Forum 

The new era of swaps trading may compel firms to take a new look at the way they build out infrastructures and workflows. 

The rigors of mandated execution for over-the-counter (OTC) swaps is cutting across the traditional front-to-back office barriers and is requiring market participants to stretch incumbent IT infrastructures, workflows and operations to cover the full life-cycle needs of interest rate, credit, currency, equity and commodity asset classes. The rapidly evolving world of swaps trading is compelling firms to quickly find ways to cost effectively manage their usage of swap execution facilities (SEFs) as they revamp incumbent infrastructures for OTC, bilateral, exchange-traded and cleared transactions.

Firms are reviewing the systems they have for trade capture, valuation, compliance and limits monitoring, confirmations and affirmations, transaction enrichment, regulatory reporting, position and risk reporting, collateral management, accounting, and cash management. The OTC execution and clearing reforms will also impact settlement, accounting, treasury management and regulatory reporting processes.

Fragmented Systems 

A major complication in accommodating a variety of swaps via multiple processes is the fragmentation of IT systems, operations and workflows. Incumbent autonomous applications for trading and risk management that are either not integrated or poorly connected could prevent firms from streamlining operations and achieving an enterprise-wide view of exposure potential.

Disparate systems can complicate and delay frontline traders and risk managers in need of real-time and intraday data. Staff workflows can also be disjointed, especially when tasks are completed without a single, consistent set of information.

In addition, data transfers among autonomous systems are error prone, causing delays via corrections, reconciliations or, in worst-case scenarios, broken and failed transactions. Firms that want to know their trading positions in real time will find this situation unacceptable.

Other workflow issues challenging firms include the need to streamline the capture of executed trades, the confirmation of executions, gathering fill details, making allocations, establishing clearing statuses and certainty of clearing, and swap data repository (SDR) reporting. Firms will also have to satisfy internal demands, such as the overall adherence to internal policies. In addition, SEF membership will require market participants to take on new burdens, such as record-keeping (beyond SDR reporting) and auditing responsibilities to meet regulators’ needs.

Perhaps the best answer is to move from a fragmented environment to a comprehensive, unified approach. Getting there won’t be easy but it will go a long way toward satisfying regulators and internal trading groups as firms try to stay ahead of the competition.

For more on the infrastructure and workflow challenges emerging in the new swaps market, read OpenLink’s recent white paper, “SEF Compliance Amid Regulatory Turbulence,” below. 

SEF Compliance Amid Regulatory Turbulence