The implementation of over-the-counter (OTC) derivatives market reform will cause data levels to surge as much as 400% above current levels, says Tabb Group. Electronic trading, clearing, reporting, risk management and other Dodd-Frank Act and European Market Infrastructure Regulation (EMIR) reform-mandated processes will produce and consume massive amounts of data never seen before by the swaps market.
Readying technology platforms to meet these reforms will not be an exercise in compliance but one of survival, said Kevin McPartland, a principal at Tabb, director of the firm’s new fixed-income practice and author of ‘Technology and Financial Reform: Data, Derivatives and Decision-Making’. He writes that the “OTC derivatives market reform in the US and across Europe is at the centre of this data challenge and he who holds the data, and knows what to do with it, will hold the power.” Although relationships will continue to be essential across all regulated markets, he adds, “just like equities, futures and options before them, OTC derivative market winners and losers will be determined by the strength and intelligence of their technology infrastructure.”
Drawing on interviews with top-tier swaps dealers, buy-side firms, exchanges, clearinghouses and swap-execution facilities (SEFs), Tabb estimates that OTC derivatives market participants will spend US$3.4bn in 2011 on clearing and back-office technology alone. According to Tabb, even 10% of the current listed market transaction volume would equate to a nearly 20 times increase in OTC derivatives transactions. “Upgrading legacy OTC derivatives technology to cope not only with the quantity of data but the complexity of necessary calculations is a rather formidable task,” according to McPartland.
OTC derivatives reform will account for over 50 new sources of data, a Tabb estimate that includes only the three main points in the trade lifecycle – SEFs, clearinghouses and swaps data repositories. Most market participants, said McPartland, will turn to third-party providers for additional valuations data, risk management inputs, curves and cash flows, among others data sources, as well as new data generated internally to assist with trading and risk management. “Nearly every market participant we interviewed for this research agreed that latency would become a much bigger issue in swaps trading as the market evolves,” he added.
Existing networks are more than capable of handling the flood of new data. As McPartland points out, OTC derivatives market data still pales in comparison to the quote messages generated by listed-derivative markets, but going from 2,000 trade sides a day to an estimated 40,000 will require a fundamental rethinking of OTC derivatives data management.
“To that end, bringing the data mart concept to the front office is essential,” he said, and an infrastructure that can pull in and normalise 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. “The challenge will be in creating a best-of-breed solution based on a combination of in-house and third-party technology to solve the vast array of data challenges,” he concluded.
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