Posts tagged ‘straight-through processing’

As regulators move closer to drafting specific rules around the derivatives market, it is important to remember one of the key drivers behind regulatory interest: risk. As the failure of Lehman Brothers has shown us, risk can take many forms. You can find examples of operational, counterparty, market, and asset class specific risk, among others.

Of course, Lehman also taught us why firms need to understand their intraday risk – their risk as it changes throughout the day. Traditionally, it was fine to calculate risk on an end-of-day basis, or to respond to exceptions or problems on a T+1 basis. As discussed in my previous post, that’s no longer sufficient.

In the listed derivatives market, one type of risk which arises is from trades either claimed or unclaimed from give-in and give-out trades between firms. For example, if the recipient FCM fails, an executing broker giving trades out to that FCM may end up posting those positions to its own books. This results in potential risk when margin calls from the exchange and additional capital requirements are required to support those positions. Also mismanagement of allocations received could mean that individual customers going over their credit/position limit were allowed to continue trading even when existing controls should have stopped them.

This creates specific business problems for both the buy- and sell-side.

For example, the buy-side:

• Needs automated trade confirmation to reduce manual tasks
• Is looking for reduced costs and operational risks
• Needs the ability to interface with multiple clearing brokers through the same interface to reduce “clearer risk”
• Needs continuous, real-time connectivity to the market and back-office systems to better manage trading positions
• Needs the ability to handle settlement instructions in real-time
• Needs faster response time on confirmations

The sell-side needs to:

• Reduce unclaimed allocation risks (which could spell potentially huge losses if a firm goes out of business before it accepts a large trade)
• Reduce operational expenses with straight-through processing
• Be able to launch end-of-day processes earlier in the day, reducing overtime and operational risk
• Be able to bring on new client business more quickly and thereby increase its competitive offering to prospective buy-side customers
• Replace manual, balkanized and error-prone average pricing processes
• Increase the speed and accuracy of confirmations to customers
• Better manage cross-customer, cross-application codes and static data
• Better handle of T+n Kerb trading

Did I leave anything out? What would you add to these lists?