Introduction

Its a given that full automation for many key

trading and related operational processes will
not be achieved overnight. For many nancial
services rms, their top concern for securities
processing will be the impact of the newly
established regime for executed and cleared
over-the-counter (OTC), exchange-traded
and bespoke bilateral derivatives. Also high
on their list is a major opportunity to achieve
real straight-through processing (STP) for the
new matrix of collateral management. Most
rms will also want a real-time, holistic view of
the essential transaction data streaming from
traders to operations.
Each of these operational challenges is a
work-in-progress that has data management
at its core. In each case, data needs to be
pulled from many sources and distributed
across the enterprise. For many rms,
this still involves many manual steps and
obstacles. These problems, however, are not
insurmountable.
Historically, OTC derivatives trading, clearing,
and settlement have been unregulated,
bilateral processes. The trade workow was
often handled through manual intervention,
pushing data and metrics throughout a bank
or other securities trading organization.
MAY 2014 - WHITE PAPER #11
INSIGHTS FOR YOUR INDUSTRY:
Single Source of Clean Data:
Modern Data Management
FINANCIAL SERVICES

The key is
to establish a
single source
of clean data
for all nancial
information
shared.

Counterparties then communicated via mail,

fax, and phone. The regulators, the markets
and advances in technology have made a
completely manual approach insufcient for
most rms. In order for rms to compete,
all departments within a trading enterprise
must see the same data from the beginning
of the transaction to the nal stages of post-
trade processing.
The key is to establish a single source of
clean data for all nancial information shared
among front-, middle- and back-ofce
operations. The correct data is essential
as discrepancies can lead to breaks in the
transaction workow. For instance, when
a rm does not have accurate data about
its funding position, as evidenced in the
collateral management mishaps that led to
the collapse of Lehman Brothers, disaster
ensues.
The Great Recession revealed, among other
things, that OTC derivatives processing
was based on weak or nonexistent data
infrastructures that resulted in a lack of
adequate operational and counterparty
nancial risk management. The missing
information about a rms exact funding
position in the market can have dire
consequences.

Data
management
challenges require
rms to maintain a
universal clarity in
order to transact,
manage, and
survive in todays
dynamic data
landscape.

The right
data will prove
to be essential in
conquering the
new collateral
problem.

Single Source of Clean Data: Modern Data Management OpenLink Insights

May 2014 - White Paper #11 Page 2
The current data management challenges
require rms to maintain a universal clarity
in order to transact, manage, and survive in
todays dynamic data landscape.
Single Source of Clean Data: Getting
on the Same Page
Global regulatory reforms have yielded
multiple data problems, especially for
collateral and margining management.
This has caused an overriding demand for
transparency. In particular, approximately
$3 trillion to $4 trillion is needed to fulll
collateral obligations for the burgeoning
reforms of the OTC swap markets
1
. An
additional $10 trillion worth of collateral will
be needed by the industry over the next two
to three years. However, a collateral shortage
is looming as there is only $18 trillion of high
quality paper in the world (see gure 1).
The right data will prove to be essential in
conquering the new collateral problem. The
rst step will be to retrieve the correct price
of an OTC derivative and then source the
exact amount of collateral from a diminishing
resource to cover a transaction.
Finding the best price for an OTC instrument
transaction is more than reviewing the latest
market data. First, rms have to gather a
multitude of data points such as the various
margin amounts at competing clearinghouses,
collateral eligibility, haircuts associated
with collateralized positions and associated
processing fees. These information ows have
to be synthesized at the front- ofce in order
to understand the true value of entering a new
OTC derivative position. Secondly, these data
points have to be the same information that
the back-ofce receives to ensure seamless
processing throughout the OTC trade
lifecycle. At the same time, all parties working
in tandem to implement efcient collateral
management in a proactive manner must use
this same set of clean data. Finally, a trading
enterprise that consistently stores data will
have far more accurate reconciliations with its
elected swap data repository (SDR), an entity
that facilitates market transparency and price
discovery.
But there are other uses for the right data.
Firms need to employ data analytics that can
be applied to meet the onset of new OTC
derivative regulations and guidelines. The
FIGURE 1:
Present and Future Demands for Collateral
$18 Trillion
High Quality Paper
in the World
$10 Trillion
Collateral Needs in 23 Years
$3-4 Trillion
Immediate
Collateral Needs
1
TABB Group. 2014. Margin Call: Risk Analytics for the Buy Side,
www.tabbgroup.com

The best
response to these
challenges is a front-
to-back IT solution
that covers the
entire value chain of
execution, clearing
and post-trade
processing of OTC
derivatives.

Data for risk

management must
serve limit controls,
reconciliation and
accounting.

Firms need
data to underpin
securities lending
for collateral
purposes and for
repo market access
with the attendant
funding and haircut
treatments.

goal of risk analytics is to optimize trading

activity while minimizing risk. A broad
category, risk analytics can be applied to
calculating the effect of price uctuations on
portfolio performance, sourcing the cheapest,
most abundant source of collateral and
monitoring trade workows. Furthermore,
risk analytics need to be available to traders,
operations, accounting, corporate nance,
and other groups within a rm that facilitate
securities processing. This is to ensure that
all of these parties are sourcing collateral by
using the latest best practices while mitigating
the associated uncertainties. The ultimate
goal of risk analytics is to understand the
fundamental and idiosyncratic characteristics
of the pledged collateral and acquire a holistic
view of present and near-term risks.
Unfortunately, time is of the essence for
price discovery, risk analytics, and other
functions that have to occur at the utmost
speed. The U.S. Commodity Futures Trading
Commissions Rules 1.73 and 1.74 specify
that futures commission merchants (FCMs)
and clearing brokers must accept trades for
clearing within 60 seconds. The same rules
state that derivatives clearing organizations
(DCOs) have 10 seconds to accept
transactions.
Given the parameters, OTC market
participants require assurances that the
clearinghouse will not reject the trade. If a
trade is rejected, rms are obligated to meet
an immediate margin call or possibly face
repercussions that include and are not limited
to breakage costs and penalties to unwind
the position, not to mention the price impacts
of re-entering the trade.
The best response to these challenges is a
front-to-back IT solution that covers the entire
value chain of execution, clearing and post-
trade processing of OTC derivatives (see
gure 2). It must also support the following
transaction lifecycle processes:
Pre-trade Analysis: Data coverage begins
with activities done before a transaction
is executed. This includes investment
research, sales and marketing of new
collateral assets like corporate bonds,
position review for managing portfolio line
items on a daily basis, risk limit compliance
to ensure proper risk-taking activity and
liquidity sourcing for margin-efcient
transactions.
Trade Execution: This refers to capturing
data at or near the time that a transaction
is consummated. Key information is
needed for order management, routing,
and execution.
Middle Offce: This level is the rst line of
post-trade analysis and processing. This
encompasses the booking and accounting
of positions and facilitating allocations.
The nancial instruments valuation is
used for benchmarking and measuring
performance. The risk analytics at this
stage are used to optimize the investment
activity and help minimize market risk while
optimal collateral management compels
rms to do a better job of record-keeping,
valuation, risk, and posting of collateral.
Back Ofce: Data for risk management
must serve limit controls, reconciliation
and accounting. Desk-level risk data is
aggregated and monitored to make certain
that nancial thresholds are not breached.
The back ofce plays an important role in
the rm-wide auditing and reconciling of all
account activity. Back-ofce staff members
also handle trade break procedures and
interact with all parties, for example SDRs,
to fully resolve trade failure issues.
Asset Servicing/Custody: Data can ensure
transparency, safekeeping, accounting,
and efcient transfer of collateral.
Ancillary Services: Firms need data to
underpin securities lending for collateral
purposes and for repo market access
with the attendant funding and haircut
treatments.
May 2014 - White Paper #11 Page 3
Single Source of Clean Data: Modern Data Management OpenLink Insights

As the
new world of
derivatives trading
takes shape, asset
managers, FCMs,
CCPs, SDRs and
custodians need
a reporting and
communication
standard for
their swaps
transactions.

Harbingers of Hope
The second decade of the 21st century for
the global nancial services industry should
not be known solely for a wave of complex
nancial rules, regulations and guidelines.
The regulatory overhaul has also spurred
innovation in the form of a new standard to
help with clearing links, the emergence of
central counterparty clearinghouse (CCP)
providers and advances in STP.
As the new world of derivatives trading
takes shape, asset managers, FCMs, CCPs,
SDRs and custodians need a reporting and
communication standard for their swaps
transactions. In short, they need to simplify
integration with data systems, and automate
reconciliation in order to make clearing and
communications more concise and efcient.
The Clearing Connectivity Standard (CCS) is
being offered as a new industry-led reporting
and communication benchmark for OTC
derivatives. The CCS effort targets buy-side
rms by offering to automate many forms of
regulatory-mandated reporting, including
splitting margin payments to CCPs.
The benets of CCS are connectivity, the
netting of positions, and recording data
for other uses. The CCS push will include
functionality to separate payments for initial
margin, variation margin and commissions.
In fact, they can be grouped together and
netted off, or paid separately via CCS. In
other words, a buy-side rm with multiple
CCP accounts will be able to automate the
separation of payments at the account level.
The absence of a formal standard for
formatting or transmitting data between
entities can delay onboarding to SDRs.
Without a standard, rms face increased
operational risk, costly interface development
and maintenance issues with each custodian.
However, CCS is gaining traction as a standard
for the nancial industry it has been well
received by the International Swaps and
Derivatives Association (ISDA) and Securities
Industry and Financial Markets Association
(SIFMA).
Five of the largest clearing brokers in the U.S.
Bank of America, Merrill Lynch, Barclays,
JPMorgan, and UBS have thrown their
support behind CCS. ISDA ofcials have
also met with representatives from Eurex,
Intercontinental Exchange (ICE), Singapore
Exchange, and the Tokyo Stock Exchange to
garner further support.
The exibility of CCS also enables it to adapt
to the future needs of ongoing regulatory
reform. For instance, CCS will be moving away
from its comma-separated values (CSV) le
format to the XML-based industry standard
Financial Products Markup Language (FpML).
The FpML implementation will allow CCS to
be used widely across the Internet.
May 2014 - White Paper #11 Page 4
Single Source of Clean Data: Modern Data Management OpenLink Insights
Ancillary
Services
Back Ofce
Asset
Servicing/
Custody
Pre-Trade
Trade
Execution
Middle
Ofce
Front-to-Back
OTC Processing
FIGURE 2:
Transaction Lifecycle Processes

The goal of STP

is an impeccable,
automated
electronic transfer
of identical
information to all
parties in as close
to real-time as
possible.

What is a CCP?
Overseen by clearinghouses, CCPs are
intended to bring a new transparency to
derivatives trading. A CCP interposes itself
between the original counterparties to a
trade by becoming a seller to every buyer
and a buyer to every seller via novation. This
can help reduce counterparty credit risk and
helps ensure that all information about a trade
is centralized. In other words, a CCP provides
a golden copy of data to all parties that
should be privy to the information.
CCPs are structured to fortify the contractual
obligations embedded in the derivatives
positions. CCPs are used to manage and
mitigate the credit risk of counterparties
during the lifetime of a derivatives contract.
For instance, the CCP calculates the change
in value of the positions of its members
on a regular basis in order to determine
the collateral required to meet margin
requirements.
What is STP?
STP is the total automation of the securities-
trading process, end-to-end, from trade order
to settlement (see gure 3). The goal of STP is
an impeccable, automated electronic transfer
of identical information to all parties in as
close to real-time as possible. STP requires
automated workows, from the front-ofce,
all the way to the back-ofce without manual
intervention.
The Upside of STP:
Eliminates the re-entry of OTC derivative
trade information after the transaction has
entered the workow.
Provides automatic links and paperless
processing, from front-to-back, regardless
of the parties involved and/or their
geographic locations.
Automates workfow in order to facilitate
transaction monitoring and exception
alerts.
Applies manual prevention or data
processing on an exceptional basis.
Provides an absolute connection between
external partners involved in a nancial
process including trading platforms,
clearinghouses, conrmation platforms
and other information providers.
Reduces operational risk via enhanced
controls, and minimized transaction costs.
Second, the increasing commoditization
of nancial products within the industry
is leading to decreasing prot margins.
Maintaining the prot level will depend on
cost reductions that can be achieved via the
operational efciencies of STP.
STP could play a vital role in helping rms
cope with the regulatory environment by
facilitating the amalgamation of market
information. This would involve all parties
such as traders, operations staff, accountants,
and corporate nance professionals to source
for the enterprise the cheapest collateral and
monitor price uctuations in the respective
portfolio positions. This helps build the case
for the advantages of STP, including lower
transaction costs and higher prot levels.
May 2014 - White Paper #11 Page 5
Single Source of Clean Data: Modern Data Management OpenLink Insights

A new mode of
data management
is taking root in
this new regulatory
regime.

Roadblocks to Automation and

Effcient Collateral Management
A new mode of data management is taking
root in this new regulatory regime. Robust
information dissemination and pledging the
cheapest source of securities are becoming
realities. CCPs and STP could effectively
bring about full automation, and could help
rms nd relevant market inputs relating to
liquidity and margin requirements. However,
there are roadblocks that still stand in the way
such as:
Lack of standardization
Conficting valuation methods
Manual transactions
Future regulatory reform
Lack of Standardization
OTC derivative instruments do not yet have a
specic set of classications to provide clarity
across the industry. This makes it difcult
for trading enterprises to secure and post
collateral for derivatives positions in a timely
manner. By contrast, for exchange-traded
assets, a risk-weighted calculation serves as
the main method for determining the amount
of collateral needed. For now, global OTC
derivatives include interest rate contracts,
foreign exchange contracts, credit derivatives,
equity contracts and commodity contracts,
which include forwards and swaps. Bilateral
transactions are based upon contracts that
are historically tailored to the needs of the two
parties to the transaction. Processing these
frequently complex instruments also requires
managing data that underpins lock-ups, notice
periods and settlement schedules. These
non-vanilla products require a greater amount
of sequential, non-standard communication
among multiple parties. Hence, the number
of breaks increases exponentially.
The industry also suffers from multiple,
incompatible data formats that force rms to
navigate blind alleys. This creates obstacles
when rms attempt to share data for a
multitude of front- and back-ofce functions.
This also impedes efcient data sharing
with CCPs and SDRs. Historically, there has
been no impetus for industry standards for
data formats, thus distinct and idiosyncratic
identiers are the status quo within the OTC
marketplace. The ongoing result of more
trade breaks wastes time and millions of
dollars in annual expenditures.
May 2014 - White Paper #11 Page 6
Single Source of Clean Data: Modern Data Management OpenLink Insights
STANDARDIZATION
Standardization of
business processes
ACCURACY
Accuracy of
trade information
STABILITY
Stability and security
SPEED
Trade information has
to be passed in
real-time among the
buy-side rm, the
sell-side entity, and
all other companies
supporting the
transaction process
STP
Pre-Trade Execution Post-Trade
FIGURE 3:
The Critical Success Parameters of STP

Market
participants lack the
ability to value OTC
products and the
associated collateral
in a timely and
reliable manner.

Conficting Valuation Methods

Market participants lack the ability to value
OTC products and the associated collateral
in a timely and reliable manner. The usual
suspects relating to valuation issues are
conicting third-party pricing data offerings,
incorrect pricing of OTC instruments in
illiquid and historically opaque markets, and
inconsistent proprietary pricing models. For
relatively standard instruments such as interest
rate swaps, different valuation methodologies
still lead to pricing differences.
Valuation issues do not stop there. In this
sphere, the CCP is the law of the land. The
parties in a bilateral OTC transaction have
been able to discuss and agree upon the price
and margin requirements of the OTC product
in question. Today, no such mediation is in
place for OTC markets. The CCP has the right
to call as much margin as it feels is necessary
for the respective transaction. There is a
sense of powerlessness in this regard. Some
rms are creating direct contacts to the CCP
to ensure that its denition of collateral is the
same as the FCMs. Others are accepting what
the CCP dictates even if the clearing process
may be awed and may cause failed trades.
Manual Transactions
The commonplace manual processing of
OTC transactions results in errors and high
risks. Manual processing tends to increase
as the nature of the OTC derivative becomes
more complex and more customized. Even
for relatively standard instruments such as
an interest rate swap, processing a trade
conrmation can take up to two weeks.
Buy-side rms have often been cited as
struggling to manage the novation process
with a combination of paper-based les and
Microsoft Excel spreadsheets that can lead to
failed settlements. Firms have often employed
50 or more full-time and/or part-time middle-
ofce and back-ofce personnel to work on
highly complex reconciliation problems.
Market research has shown that 90% of
audited spreadsheets contain errors. The
OTC marketplace is not familiar with auditing,
which leads to even more mistakes (see gure
4).
May 2014 - White Paper #11 Page 7
Single Source of Clean Data: Modern Data Management OpenLink Insights
FIGURE 4:
Audited Spreadsheet Error Count
90%
Audited Spreadsheets
Containing Errors
10%
No Errors

The TIW is the

nancial services
industrys rst and
only centralized
global repository
for trade reporting
and post-trade
processing of OTC
CDS contracts.

IT systems
that are able to
handle todays
requirements are
not necessarily
suited for the
regulatory
guidances and
clarications that
are likely to come
over the next six
months.

Future Regulatory Reform

Regulatory reform for global markets is
far from over. A consistent ow of global
regulations with multiple time-frames and
deadlines has become the norm. IT systems
that are able to handle todays requirements
are not necessarily suited for the regulatory
guidances and clarications that are likely to
come over the next six months. For instance,
the December 2012 implementation deadline
of the G-20 commitments for coordinated
securities market reform has already passed.
Sovereign regulators still have yet to
harmonize their respective regulatory rules.
Harmonization could even take more time
due to further delays and extensions, adding
more data management and system update
burdens.
More complications are coming. The
provisions across regulations are not
uniform. The European Market Infrastructure
Regulation (EMIR) legislation does not cover
the complete gamut of OTC derivatives
markets. However, Title VII of the Dodd-
Frank Wall Street Reform and Consumer
Protection Act covers the whole spectrum.
Data management systems need to have
enough exibility to reconcile the regulatory
disparities. Systems also need to be receptive
to future updates on an ongoing basis.
Case Study: The CDS Market
Credit default swaps (CDS) are highly
standardized, negotiated derivatives
transactions that were created to shift the
credit exposure associated with xed income
instruments. Essentially, CDS buyers get a level
of insurance against a negative credit event
such as a default on a loan or on a mortgage.
Nearly all, or 92%, of CDS transaction volume
is now electronically conrmed
2,3
, which was
the major industry concern before the Great
Recession. The high percentage of CDS
electronic conrmations has given the Trade
Information Warehouse (TIW) a prominent
role in the industry.
The TIW is the nancial services industrys
rst and only centralized global repository for
trade reporting and post-trade processing
of OTC CDS contracts. TIW comprises a
trade reporting repository that operates and
maintains the centralized global electronic
database for virtually all CDS contracts
outstanding in the marketplace along with
a robust infrastructure that gives market
participants a wide range of automated
operational capabilities. When uploaded
to the TIW, each transaction receives a
unique identier and the lifetime events
of the transaction may be aligned among
counterparties to the trade. TIW supports
CDS credit event processing for bankruptcy
and failure to pay and has the STP links to
various third-party providers for portfolio
reconciliation and compression, and exposure
management.
All major market participants are currently
connected to TIW and settle coupon
payments and payments resulting from
credit events through the central settlement
system. Moreover, major market participants
have committed themselves to settle 90%
of settlement volume on electronically
matched transactions via TIW and the central
settlement system
4
.
The trading of CDS instruments and post-
trade processing serve as a model for other
OTC derivatives because:
There is an STP infrastructure namely, a
data repository that supports automation,
mitigating human error.
Market participants have dedicated
themselves to using the same infrastructure
to effect transactions among themselves.
CDS processing is seen as event-driven
instead of trade-driven due to the long
maturities of CDS.
May 2014 - White Paper #11 Page 8
Single Source of Clean Data: Modern Data Management OpenLink Insights
4
International Swaps and Derivatives Association (ISDA). 2009.
Operations Benchmarking Survey, www.isda.org
2
International Swaps and Derivatives Association (ISDA). 2009.
Operations Benchmarking Survey, www.isda.org
3
Markit. 2009. Q3 Metrics Trend Report, October 2009,
www.markit.com

STP can
provide a trading
enterprise with
a sole vantage
point for all
securities.

A new
dynamic of data
management
is crucial to
efcient collateral
management.

Conclusion
Overhauling the OTC marketplace is required
in order to replace manual intervention in
derivatives trade processing. Departmental
heads at trading enterprises are pushing
vendors and standards bodies for a universal
view of balance sheets at rms. All the while,
the amount of global high quality collateral is
limited due to regulatory requirements (see
gure 4).
A new dynamic of data management is crucial
to efcient collateral management and a real-
time, holistic view of data streaming from the
front-ofce to the back-ofce. The challenges
of systematically calculating collateral
positions and creating the single source of
truth have become increasingly more difcult
as the number of disparate data points
multiply at an exponential rate. STP and CCPs
can help rms address these difculties.
STP can provide a trading enterprise with
a sole vantage point for all securities. CCPs
centralize the settlement process and
produce margin requirements that change
according to portfolio values on an intraday
basis. In addition, breakthroughs such as the
Clearing Connectivity Standard will move
the industry closer to 100% automation and
collateral maximization.
Nevertheless, data management issues still
persist in the OTC marketplace. There is no
standard for OTC derivative categorization.
Valuation methods differ among parties.
Some trade processes are prone to human
error and could benet from automation.
Ultimately, much of the forward progress
is likely to be rocky because of an ongoing
regulatory reform process. Despite the
uneven progress the industry may take,
trading enterprises need to stay focused
on the vital need to provide uniform data
management for derivatives transactions.
Single Source of Clean Data: Modern Data Management OpenLink Insights
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For further information, please contact OpenLinks Subject Matter Expert on Derivatives and
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