In a world where it’s becoming almost as important what happens after a trade is completed as when the trade itself happens, the role of the post-trade service provider is crucial to the flow of clearing.
Indeed, while their business might be decidedly back-office, the post-trade provider is now more front and center than ever before.
Post-trade service providers like Traiana and MarkitServ have long filled a key role. After a trade is complete, it goes through post-trade processing, where the buyer and the seller compare trade details, approve the transaction, change records of ownership and arrange for the transfer of securities and cash. And, in markets that are not standardized, such as the over-the-counter (OTC) market, post-trade processing is particularly important to sort out details.
But, new regulations are redefining and emphasizing this role. Under Dodd-Frank, tighter regulations now surround the clearing of OTC FX derivatives and make it mandatory to clear these and other derivative instruments on regulated exchanges or swap execution facilities in the United States.
“In a world that used to focus on automation in the bank, now when they strike a trade they need to report that trade into a repository, and they need to report it automatically,” says Nick Solinger, chief marketing officer for Traiana.
In light of this new regulation, many post-trade service providers are already offering new solutions that streamline derivatives processing and manage more of the workflow. And foreign exchange clearing agents are signing up. Case in point: Six of the world’s largest FX clearers –Bank of America Merrill Lynch, Citi, Deutsche Bank, JPMorgan, Morgan Stanley, and UBS –have all inked deals to use Traiana’s new client clearing solution Harmony CCP Connect.
In March, rival MarkitServ introduced its own gateway, through which FX participants can route OTC derivatives trades to clearing houses. MarkitServ developed the new FX clearing gateway in close consultation with major market participants, and, according to a release from the company, is certified or connected to CME Group as well as LCH.Clearnet and Singapore Exchange.
Traiana claims its new solution will offer a more efficient and cost-effective way to help banks assist their clients in complying with new regulations, which are being put into effect around the world. In the United States, Solinger points out that the Dodd-Frank Act requires firms to clear and report “as soon as technologically practicable,” which puts a large burden on firms that now are interpreting that standard.
New regulations mean significant process changes for firms that used to trade bilaterally, Solinger adds, but it also means new challenges in risk monitoring and the allocations process. And while the operating rules themselves are not yet finalized, firms and clearing companies are already forced to head down the path to change in order to meet the demands of their new regulatory timelines. “Firms can’t wait for the rules to be finalized to make their technology investments,” Solinger says. “Most firms are investing ahead of the curve.”