Across the market, there are key IT systems that CCPs and clearing members are embracing, however an increasingly important facet of the conversation is how these work together.
Broadly, there are of course a lot of IT systems that clearing houses and clearing members use, but generally we can think about these as four distinct areas: a risk system or risk management system; some kind of collateral management system; an offering which deals with trades – commonly a matching and confirmation system; and finally, a system that deals with settlement, including payments.
Integration is key
If we think about this at a high level, alongside these four areas, what is of upmost importance is to have an effective market data integration system. All of those processes, whether it be risk or collateral management etc., needs access to live market data, especially when market players are increasingly seeking to do things in real time.
For effective live risk management, market participants must be able to see what’s happening in the market at any given time, so a system that will efficiently bring in market data and feed it in to all these other systems is paramount. Similarly, this is also the case when it comes to reporting and sending communications – such as trade notifications or margin calls.
The more you can improve the integration, the better value you can have, the less risk you’re exposed to, and the more transparency the processes have.
Of course, from a CCP’s point of view, you’re increasing the chances of creating new revenue streams if you’re able to provide new types of services to clearing members; so at a very high-level view, IT systems hold more potential the more they work together.
The significance of innovation to combat market structure evolution
As the market gears up for the imminent shift to T+1 in North America, there is a wealth of challenges facing players across the CCP space. Two big pillars of this are the need to reinforce systems to handle these faster settlement cycles and having the appropriate staffing and operational requirements in place to support this.
From the technology angle, there will be a lot of operational adjustments that will need to be done. Going from T+1 as compared to T+2 may on paper appear as though you’re going from 48 hours to 24 hours, but in actuality, it’s a lot less than that.
If your trade happened at 4pm on the Monday, it needs to settle by 4pm on Tuesday but in that space of time, counting the hours people are actually awake and working, you’ve got a lot less than 24 hours.
Add to that the fact that if something goes wrong – unless you’ve got the right kind of coverage such as night shifts – dealing with these problems will also take up a significant amount of your window, which makes it even more important than you’ve got strong and resilient processing systems.
Using cloud to deliver resilience and new services
Elsewhere, the ever-evolving cloud debate is continuing to be front of mind for actors in the space. There are significant and widely-accepted advantages to the cloud in the space which theoretically make it an important tool going forward.
In practice, we can expect better scalability, more cost efficiency, and better resilience, benefits which are especially true for global or pan-regional CCPs – for example, it can allow for different market centres, different infrastructures, and better failovers.
Aside from this resilience aspect however, it also has the potential to help with improved innovation, presenting an avenue through which to more seamlessly deliver new services to markets. With the cloud making it possible to try out new things faster, we can expect a quicker introduction of new systems – opening up new commercial opportunities for both CCPs and their members.
Empirically, the technology provides a potentially easier way to start up new cloud-based services, including those related to margin calculations, collateral transformations, and market valuations, or a new kind of a member portal for instance, and reduces the internal IT overhead if you’re able to put it out onto well-developed cloud architecture.
Cloud adoption has clear benefits, including being able to run better stress testing scenarios which is undoubtedly incredibly important, as well as being able to do more things in real time, including more timely risk management and market monitoring. It’s worth remembering, though, that cloud is no ‘silver bullet’, and requires skills and investment to deliver its undoubted benefits.
Cybersecurity
In the financial markets, a successful attack on a major clearinghouse could cause massive disruption. Given some of the cyber-attack incidents that we’ve had in recent times, the market – and especially CCPs are becoming more acutely aware of the importance of staying ahead of the curve when it comes to innovations.
Overall, it’s about increasing resiliency – and while it’s a mixed picture currently – it is clear to the market that there is ultimately one direction of travel.
