Seismic shift or gentle transformation? The fallout of the CME decision

The CME has had a long history in the regulatory reporting industry coupled with strong client relationships. Their recent announcement about their departure from Asia and Europe as a TR/ARM and vendor has caused shockwaves across the market and, without a doubt, they will be missed.

The impact from the CME decision is far reaching and touches many players in the regulatory reporting space. CME clients need to consider how best to manage their ongoing regulatory reporting processes with as little disruption as possible, but this will be complicated by having minimal budget and resources to manage this unexpectant event. Vendors are gearing up to take on additional clients and the TRs and ARMs themselves are preparing for additional volumes as a result of migration from CME’s clients, particularly under EMIR which requires a full history porting from CME to the new TR.

These immediate challenges are being dealt with, but there are also four larger areas that could have a much longer-term effect on the industry – 1. Pricing 2. Technology 3. Service and 4. Impact on the ecosystem.

  1. Pricing

Realistically, this is likely to change following CME’s departure. For many years, CME has been competitive on pricing so at its simplest, their departure will lead to the average price of trade reporting going up.

A more complex question is how pricing will evolve in the coming months and years. In our opinion, there is likely to be some overall increase to reflect a new paradigm. The innate requirements in this space with regards to, for example, the volume of data involved, the need for quality technology and service and the cost of ongoing investment to continue and comply with evolving regulatory demands, all impact price. It’s also interesting that the firm closing operations is the one providing lower prices, strongly suggesting that at that price point, the necessary investment to be viable was not economical.

Having said all this, we believe that vendor pricing in this space will remain lower than total cost of ownership for a firm developing its own reporting solution and paying to the end points (TRs & ARMs). The product will also be an improvement as vendors can share their build cost amongst their clients and build a better product on the back of their experience working with many compliance and operation managers

  1. Service

Service and cost are intrinsically linked. If cost is the deciding factor in decision making, driving a “race to the bottom”, there will be an inevitable negative impact on service. Reduced scope for investment in new products and technology, as well as the need to limit human support and innovation will be restricted if margins are too tight.

However, if pricing is fair, the key deciding factor becomes product and service, creating real opportunities to benefit clients and the overall market through the use of the right product with the right capabilities and know-how behind it. Firms are likely to expect better services and will be looking for service providers who understand the regulatory landscape, have excellent products and are focused on client requirements. Smaller and mid-size clients will also want to ensure they are receiving high quality service and are equally prioritised when working with vendors, something they may not get if they elect to report directly to an end point.

  1. Technology

With a lot of change in the market, this is a unique opportunity to see improvements in technology and greater automation. As clients review their existing processes there are real advantages in ensuring best-of-breed technology is embedded. Many clients have already expressed an interest in greater automation and in trialling additional technologies they may not have had time or resources to explore previously. For example, the more robust the technology is to handle big data and extract compliance insights or the greater the transparency it can provide the end-user through the use of easily accessible compliance dashboards, the more attractive the solution will be.

As with service levels, increased investment in technology is likely to drive additional innovation across the industry. For vendors and TRs/ARMs, it’s also likely that the quality of the technology as well as ease of implementation will be key differentiating factors.

  1. Market eco-system

The CME’s departure is likely to change how financial institutions plan and make decisions when choosing TR/ARMs and other service providers. It’s also likely that non-CME clients will be considering the risk of existing TR/ARMs or vendors exiting the market. They may require flexibility to easily switch TR/ARM providers or have plugins/adapters for easy transfer of data, driving the creation of solutions that are more robust and more portable or flexible. It may also have the effect of encouraging financial institutions to further enhance their control and management processes, ensuring they’re better able to monitor and adjust for changes. Vendors have long encouraged clients to use a purposefully built monitoring system for improved monitoring and KPI-management. Understanding the options will be important clients who want to remain on top of their reporting obligations and requirements.

The shift towards a more robust regulatory landscape

Overall, while there’s likely to be initial pain for the market in the next six to twelve months, the increased efficiency and effectiveness of transaction reporting across the board is likely to bring a net positive effect. Improved technology and better systems will allow those with a reporting obligation to truly meet the original intentions underpinning these regulations. Such tools and services will elevate the compliance officer from having to chase after the individual issues to taking a wider birds-eye-view at the process and manage it rather than react to issues. This will improve the overall robustness of this key regulated activity.

But taking it one significant step further, these improvements will allow a wider range of financial institutions to begin better utilising the masses of trade data created and tracked for reporting and other compliance purposes. Finally, the use of this data for the purposes of making improved business decisions may become a reality for more than just the minority.

By Ronen Kertis, CEO and founder, Cappitech