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 ﬂuctuations on portfolio performance, sourcing the cheapest, most abundant source of collateral and monitoring trade workﬂows. Furthermore, risk analytics need to be available to traders, operations, accounting, corporate ﬁnance, and other groups within a ﬁrm 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 Commission’s 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, ﬁrms 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 ﬁgure 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-efﬁcient 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 Ofce:
This level is the ﬁrst line of post-trade analysis and processing. This encompasses the booking and accounting of positions and facilitating allocations. The ﬁnancial instrument’s 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 ﬁrms to do a better job of record-keeping, valuation, risk, and posting of collateral.
Data for risk management must serve limit controls, reconciliation and accounting. Desk-level risk data is aggregated and monitored to make certain that ﬁnancial thresholds are not breached. The back ofﬁce plays an important role in the ﬁrm-wide auditing and reconciling of all account activity. Back-ofﬁce staff members also handle trade break procedures and interact with all parties, for example SDRs, to fully resolve trade failure issues.
Data can ensure transparency, safekeeping, accounting, and efﬁcient 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 #11Page 3Single Source of Clean Data: Modern Data ManagementOpenLink Insights