Derivatives clearing providers called out for legacy systems

Whitepaper urges firms providing derivatives clearing services to update legacy systems or risk being left behind.

Outdated and legacy systems still in place at firms providing derivatives clearing must be replaced as the industry faces increased pressures, according to a recently published whitepaper.

Co-written by IBM, Minium and Promontory, the whitepaper examined the future for derivatives clearing and prime services, outlining existing problems with the industry and listing technology as one of the most important challenges.  

“Many firms have shrunk their books of business to cope, but the situation is unstable - for firms and the market as a whole. New strategies, business models, and processes must be found,” the paper stated.

“The patchwork of outdated systems most firms use today is not fit for purpose - firms simply will not be able to deliver the right level of return on equity for their clearing and prime-brokerage businesses without a radical reassessment of their technology stacks.”

The number of firms actively offering derivatives clearing services globally has dramatically reduced since the 2008 financial crisis, with costs of capital and regulatory burdens forcing many to shut down operations.

In April, CME Europe closed its interest rate swaps and derivatives clearing business after failing to break the dominant hold of LCH and Eurex in the swaps clearing market.

Just prior to CME’s clearing closure, Deutsche Bank closed its over-the-counter clearing business in the US following a string of regulatory penalties and balance sheet pressures.

Nomura, Royal Bank of Scotland, Jefferies and State Street are among the long list of providers to also have withdrawn from providing US clearing services.

The whitepaper has urged those who remain in the market to heavily invest in a technological overhaul or risk being overtaken by competitors. Such investments could lead to a reduction in overall costs, resilience against future regulatory change and better client service.

“There is an opportunity for firms that provide clearing and prime services to take a quantum leap forward by investing in new technologies that are tailored for modern businesses and aligned with the current regulatory environment,” the paper explained.

“A system capable of ensuring a single source of truth with real-time trade information that can be shared internally across all functions could significantly increase the profitability of clearing and prime-services businesses.”