State Street Report Takes the Pulse of Buy-Side Firms Mandated to Clear OTC Derivatives
July 30 2013 - 1:00PM
Business Wire
Buy-side firms are unprepared for new trading mechanisms, costs
and increased complexity and should partner with established
providers to adapt to an evolved OTC derivatives marketplace,
according to research commissioned by State Street Corporation
(NYSE: STT). The new research paper, “From Readiness to Revolution:
The Implementation and Impact of Derivatives Clearing Regulatory
Reform,” provides insight into preparations for swap execution
facilities (SEFs), central clearing, collateral management and
reporting.
State Street, which operates as a futures clearing merchant
(FCM) and a SEF, commissioned the research with Aite group which
surveyed buy-side firms that collectively represent more than $6
trillion in assets under management. The research highlights
developments across the entire trade life-cycle and includes a
roadmap to readiness for Category III firms - those firms that have
yet to complete the Commodity Futures Trading Commission’s (CFTC)
phased implementation of derivatives clearing.
“The days of the excel spreadsheet are gone, collateral
management has moved to the front office and phones have been
traded in for exchanges,” said Jeff Conway, executive vice
president and head of State Street Global Exchange. Global Exchange
brings together existing components from State Street’s research
and advisory, analytics, Currenex®, Global Link® and derivatives
clearing capabilities to address clients’ data information and
trading challenges. “As the trend towards electronification
continues, regulatory reform demands strong technology. We are well
positioned to provide the buy-side with solutions to these
challenges across the entire trade cycle, from execution to
clearing to collateral.”
Key highlights from the research include:
Clearing and Collateral
Category I firms (companies that have completed the transition
to mandated clearing) report that first movers had the advantage to
negotiate more advantageous FCM agreements that allowed for
preferential terms and conditions relating to fees and margin
requirements, while Category II firms (firms that have also met
clearing mandate requirements) later found FCMs less flexible in
their willingness to lower fees. Category III firms who have not
put agreements in place early will need to partner with
well-established FCMs that can quickly respond to their customers.
Other findings include:
- Firms tend to select FCMs based on
financial stability and pre-existing relationships; for firms that
had a pre-existing relationship, the FCM’s ability to bundle
services to reduce cost became a consideration
- Many firms have only on-boarded with a
single FCM and clearing house, allowing only for short term
compliancy rather than long term success with multiple FCMs to
diversify risk exposure
- Posting initial and variation margin
continues to be an operational and technological headache; nine out
of eleven firms indicate that they either already outsource the
collateral management function or intend to do so
- More than 60% of respondents indicate
that staffing and timing are critically important, with frequency
of collateral movements and impact on performance ranking “highly
important” for more than 70% of those interviewed
Execution
On June 4, 2013, final SEF rules were published in the Federal
Register that provided clarity to SEFs wanting to enter this new
marketplace, and established an effective date of August 5, 2013.
With the effective date looming, “From Readiness to Revolution” not
only addresses the anxiety the buy-side still has over new trading
mechanisms, immediately increased costs and electronification
itself, but also highlights the long term benefits that
standardized work flows and increased competition offer.
“The creation of SEFs will transform OTC derivatives markets,
resulting in economies of scale, reduced transaction risk, cost
savings, and growth in trading volumes and liquidity,” explained
Conway. “State Street’s decision to launch and apply early as a SEF
before the effective date reflects our determination to meet our
clients’ needs and be one of the first providers to help lead the
way in a revolutionized marketplace.”
State Street filed registration documents with the CFTC today
for SwapExSM to become a multi-asset SEF. This submission
establishes State Street as one of the initial entrants into this
market, and has ensured that it is among the first wave of
applications to be reviewed for approval.
By leveraging the core technology and best practices of State
Street’s Currenex, FX Connect and GovEx execution platforms, SwapEx
gives clients trade flexibility by providing multiple execution
styles across numerous asset classes. The platform will provide
portfolio compression capabilities to help relieve the regulatory
burden of higher margin requirements. SwapEx adds electronic
execution to State Street’s existing end-to-end derivatives
solution, DerivOneSM, which includes clearing, servicing,
collateral management, valuation, and risk and analytics.
About State Street Corporation
State Street Corporation (NYSE: STT) is one of the world's
leading providers of financial services to institutional investors
including investment servicing, investment management and
investment research and trading. With $25.7 trillion in assets
under custody and administration and $2.1 trillion in assets under
management* at June 30, 2013, State Street operates in more than
100 geographic markets worldwide, including the U.S., Canada,
Europe, the Middle East and Asia. For more information, visit State
Street’s web site at www.statestreet.com.
* This AUM includes the assets of the SPDR Gold Trust (approx.
$37 billion as of June 30, 2013), for which State Street Global
Markets, LLC, an affiliate of State Street Global Advisors, serves
as the marketing agent.
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