Reforms to the US and European OTC derivatives markets will cause data levels to surge as much as 400% above current levels, forcing market participants to spend US$3.4 billion in 2011 on clearing and back office technology, according to a report by TABB Group.
The report draws on interviews with swaps dealers, buy-side firms, exchanges, clearing houses and swap execution facilities (SEFs) to identify the impact of regulatory change on trading, clearing, reporting and risk management.
In response to calls from the Group of 20 political leaders to reduce systemic risk, the Dodd-Frank Act contains provisions designed to promote exchange trading and central clearing of OTC derivatives in the US. In Europe, the European market infrastructure regulation (EMIR) aims to move as much ”standardised' OTC derivatives trading on-exchange as possible, while mandating central clearing of the bulk of existing OTC trading activity.
Although it suggests that existing infrastructures and networks will be able to handle the increase in data, the report points out that the drastic expansion of data quantity will require a fundamental rethinking of OTC derivatives data management.
“Just like equities, futures and options before them, OTC derivative market winners and losers will be determined by the strength and intelligence of their technology infrastructure,” said Kevin McPartland, principal at TABB.
Emphasising the need for OTC derivatives market participants to invest in appropriate technology, the report argues that “most market participants will turn to third-party providers for additional valuations data, risk management inputs, curves and cash flows, as well as new data generated internally to assist with trading and risk management”.
Derivatives reform has hit delay in the US, where derivatives regulator the Commodity and Futures Trading Commission (CFTC) voted in June to delay the effective date of new US derivatives rules introduced by the Dodd-Frank Act until 31 December 2011.
The general effective date for certain provisions of title VII of the Dodd-Frank Act had been set at 360 days after enactment, 16 July 2010. But the CFTC said that final rules defining certain terms – including swap, security-based swap, and security-based swap agreement – would not be in place in time, leading to concerns about the impact on swaps market between 16 July 2011 and the completion of the rulemaking process.
Meanwhile in Europe, the final vote by the European Parliament on EMIR is now expected in September, following a request by MEPs to allow an extension on the original July deadline. The Council of the European Union, Europe's other key decision-taking body which represents national governments, has yet to agree a common position on EMIR.