CONNECTING THE BUYSIDE.

Eric Kolodner, managing director at Tradeweb explains how connecting derivatives trading technology with buyside systems can reduce risk and streamline the entire trading lifecycle.

In recent years there has been an evolution in the use of technology throughout the derivatives trading lifecycle. Buyside firms increasingly recognise that technology is a strategic investment which facilitates a more automated workflow and substantially reduces risk. It’s possible to dramatically streamline institutional execution businesses by integrating trading systems with other internal and external systems to reduce operational risk, while facilitating processing and reporting.

In today’s environment, integration connects functions used throughout the trading workflow. To achieve a fully integrated process, buyside firms need to be able to connect internal risk, compliance, accounting, collateral and order management systems (OMS) with external trade execution and processing functions, such as trading venues and clearinghouses.

Developing a truly integrated trading model was a costly proposition just a few years ago. The evolution of electronic trading and the innovation of regulatory compliant solutions have made it possible for more market participants – large and small – to reap the benefits of an integrated approach.

Numerous benefits

These benefits are noteworthy, especially in a leaner financial marketplace. From a risk management perspective, an automated workflow allows effective data monitoring throughout the trade process to limit the risk of failed or ‘out’ trades, while minimising the need for manual processes, thereby mitigating the operational risk of human error.

Integrated connectivity helps reduce costs, by generating significant time efficiencies through reducing the need for manual data processing and expediting back-office reconciliations. It also helps improve capacity, and clients with a variety of needs benefit from integration by being able to execute multi-legged trades or multiple trades simultaneously, and they can submit requests-for-quote (RFQ) to several dealers at once.

Another important benefit for buyside clients is the ability to allocate trades, either pre- or post-execution, and communicate settlement information to dealers, prime brokers, fund administrators and confirmation vendors.

Direct server-to-server connections using industry-standard protocols such as FIX, XML and FpML, as well as proprietary protocols, allow for the automation of post-trade processing.

Connectivity also helps firms in proving best execution by generating audit trails of each auction, and delivering post-trade summary or compliance reports. Buyside investors with integrated systems have access to real-time analytics and transaction cost analysis that can be used to continually monitor performance.

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Integration improves efficiency

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Managing regulatory reform

Managing the obligations of new and upcoming regulations for clearing, trading and reporting is also substantially easier when internal and external systems are interconnected.

• Clearing

The clearing mandate outlined by the Dodd-Frank Act and in pending European and Asian regulation requires institutional investors to clear most of their over-the-counter derivatives trades through a central counterparty. Mandatory clearing in the US started on March 11 for Category 1 clients, and over the last three months 85% of trades with US clients occurring on the Tradeweb IRS and CDS platforms have cleared. In Europe, in advance of upcoming clearing rules (currently expected in summer 2014), swaps clients are already actively using Tradeweb to execute cleared trades. The end-to-end workflow for these trades is streamlined through trading platform connectivity to derivatives clearinghouses and middleware vendors.

In addition, when a client elects to clear a trade, they are able to use Tradeweb’s first-of-its kind pre-trade credit-check solution, which determines almost instantaneously whether a customer’s available credit is sufficient to back the trade. Once the trade is executed, it is automatically submitted to the client’s clearinghouse of choice in real time.

• Trading

In the US, the final rules for swap execution facilities (SEFs) were published in the Federal Register on June 4, 2013 and became effective on August 5. The new regulation drastically changed the derivatives trading landscape and may result in a transfer of most standardised swaps trading onto centralised, transparent marketplaces. While the period leading up to approval of final rules was marked by a constant stream of new concerns that SEF-based trading would hamper derivatives liquidity in the US, the market behaviour immediately following the rules’ effective date has shown the opposite to be true. In fact, an August 2013 report from Aite Group showed that US derivatives market participants have taken Dodd-Frank trading requirements in their stride, with cleared IRS and CDS trading volume surging in the weeks following the new clearing mandates and final SEF rules.

Although the trading mandate in Europe is not expected to begin until 2015, as a result of the US regulations even those market participants not immediately affected are taking a close look at what they need to do to prepare for future rules and to achieve the benefits inherent in electronic execution.

• Reporting

Trade reporting is also facilitated efficiently through integration, which allows derivatives trades to be electronically processed once they are executed and delivers trade details downstream. Information on all trades that are reported to trade repositories and swap data repositories (SDRs) will be available for clients electronically, thereby removing the need for the client to manually fulfil any regulatory reporting requirements. Mandatory reporting began in the US this year, and is expected to start in Europe in the first quarter of 2014.

From theory to practice

During the lifecycle of an integration project, all aspects of the trading process – including pre-trade order generation, trade allocation and post-trade information requirements

– are considered. Using a collaborative approach, which also takes into account existing client systems, ensures that the most appropriate integration solution for the specific needs of every client is implemented.

Building this connectivity allows firms to address many of the challenges that they are facing in the current environment, while also reaping the benefits of an integrated approach.