The new transparency requirements that are being mooted as part of the MiFID review process by the Committee of European Securities Regulators (CESR) have resulted in a surge of interest and investment in the middle office, according to panellists discussing operational risk at last week’s Xtrakter user conference. Godfried De Vidts, director of European Affairs at Icap, explained that the need for a more harmonised approach to the post-trade space is being highlighted by the push for greater data transparency and the fragmentation of the clearing environment with the addition of new central clearing counterparties (CCPs) on the scene.
In order to keep costs and operational risk down to a minimum against a background of increasing trading volumes and the requirement to connect to a host of new participants, firms are being compelled to invest in the middle office. The European Commission’s push to create better infrastructure for the fixed income and derivatives markets is therefore causing a serious number of challenges for financial institutions currently suffering with a multiplicity of siloed middle office systems, noted De Vidts.
Nicholas Hamilton, vice president of European Fixed Income Transaction Management at JPMorgan, added that trade matching is a particular area of operational risk for many. “There is not a single vendor product out there that offers all the functions that are needed for the full trade lifecycle,” he said. “The STP of trade matching is the main non-economic challenge of this space at the moment.”
The proliferation of data standards within the middle office space is also proving challenging, noted Simon Bennett, senior consultant at HSBC. “The middle office has traditionally been the Cinderella stuck between the two ugly sisters of the front and back offices,” he joked. Not enough investment and attention has been paid to the middle office traditionally and this is exactly where the compliance challenges of today’s markets are being faced, he added.
The financial crisis has also refocused regulatory minds on the need for faster settlement cycles. Although the debate is not about T+1 as it was a few years ago, the focus is now on T+2 at a European level. De Vidts noted that the regulatory community is likely to move with lightning speed to implement this requirement as part of its overall review of the market, potentially tied in to the Securities Law Directive. “This will be a shock to those still using faxes or pigeons,” he quipped. On a more serious note, the panel agreed that these changes will put significant pressure on risk and cash management systems, as the historically lengthy cash management process would need to be considerably shortened.
Transaction reporting for the derivatives and fixed income markets will add to the overall middle office challenge, agreed panellists. Hamilton noted that JPMorgan has already invested in supporting its transaction reporting process by establishing a centralised repository for the relevant data. JPMorgan, along with UBS, has been one of the front runners in tackling this particular space and has since reaped the benefits of keeping one step ahead of the regulators (others have not been so lucky, see BarCap’s fine last year for proof).
De Vidts pointed to the securities reference data utility that has been established in Frankfurt for transaction reporting data as an indicator of where the industry as a whole is heading. “There is the real danger of garbage in, garbage out in terms of the data held in these repositories,” he warned.
Hamilton expressed his appreciation for the establishment of central repositories for this data, however. “We are aware of the challenges involved but are supportive of common denominators being established for this data across regions,” he explained.