Central Clearing of Swaps: $3.3 Billion Tech Spend
September 28, 2011
Fund managers, broker-dealers and clearinghouses will spend about $3.3 billion on technology in 2011 to help centrally clear swap trades, says a report issued on Thursday morning by Tabb Group.
Where will the $3.3 billion go? Connectivity to clearinghouses will take up the greatest chunk followed by improvements in downstream processing.
Among the types of technology which must be licensed or built: software for novations, valuations, trade matching and management, trade accounting and reporting, collateral management, data handling and storage and other back-office processing.
The Dodd-Frank Wall Street Report Act and its European counterpart will require financial firms to trade many swaps through an electronic trading platform, clear them through a central clearinghouse and then report them to a trade repository.
The central clearinghouse will receive the trade from a so-called registered swap execution facility through one of several standard protocols; the clearinghouse will then match the trades and replace the original trades with two trades, one for each side of the deal. Once trades have been checked and are found to contain the necessary attributes for valuation, clearinghouses must calculate initial and variation margin. The final piece of the equation: assuming all the trade data is correct and margin amounts agreed, messages are sent to counterparties to agree on the tersm of settlement.
“Dealers will need to maintain access to most, if not all, available clearinghouses so that they can provide their clients with choices,” say Tabb analyst Finn Christensen and principal Kevin McPartland, who wrote the report entitled: “OTC Derivatives Clearing Technology: Bringing the Back Office to the Forefront.”
Because most fund managers do not have the resources to build out and maintain the technical infrastructure they need, they will expect dealers and servicing platforms to do so.
Clearinghouses, the analysts predict, will spend more money on technology providers to replace legacy systems than rely on developing new systems on their own. In addition to calculating variation margins intraday, clearinghouses not more quickly, while they must also continuously calculate exposure to individual clearing members.