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3rd April 2024 | Insights

Futureproofing Derivatives Post-Trade

The volatility that resulted from the initial spread of Covid-19 in the spring of 2020 led to record volumes in listed derivatives trades. Coming as the market transitioned to remote working in a matter of days, it is no surprise that post-trade infrastructures came under pressure.

However, the extent of the pressure exposed weaknesses in workflows and processes over and above a simple question of capacity.

These weaknesses were seen particularly in the allocation and give-up processes. In response, the Futures Industry Association has launched the 30/30/30 standards to ensure timeliness of trade processing between counterparties.

Timeliness is a key element of improvement in the market. However, the underlying data fragmentation across the market remains an issue that has not been addressed.

A recent Acuiti report, produced in partnership with OSTTRA found that, while progress has been made across the industry since 2020, there is still a long way to go before post-trade infrastructure is future-proofed.

This study, which was based on a survey of senior derivatives-focused executives at 57 firms across the buy and sellside, found differing views on the listed derivatives industry’s progress since the operational disruptions that were seen around the initial outbreak of Covid in March and April 2020.

While only 15% claim “little progress” has been made over the past four years, 46% say there has been “a lot of progress but still small risks” remained, and 39% were of the view that there still major risks in the system.

The good news for the derivatives industry is that efforts to embed stronger market infrastructures are now widespread, with sell-side and buy-side firms working with infrastructure providers and industry associations to better optimise the post-trade environment.

Still, challenges remain. This study finds that there is almost no part of the post-trade environment that does not still require investment. Areas that respondents said remained overly costly and complex to maintain included collateral optimization, margin processing and allocation and reconciliations.

While banks, clearing houses and others are now better placed to handle higher volumes, there are challenges around a lack of standardisation, time-zone effects, and the management of legacy risks in the system.

Firms are planning investment across the trade workflow to address outstanding issues. But that investment will fall short unless it is built on firm foundations. There is no silver bullet when it comes to achieving greater cross-industry efficiency but data standardisation is a key element.

The Acuiti study found that the industry is highly supportive of a single, mandatory data set for each trade. This would make welcome industry efforts to increase the timeliness of trades significantly easier to implement.

Data standardisation should be built leveraging existing technologies and processes or risk delaying and over-complicating the path to greater resilience.

Data fragmentation will undermine industry efforts to achieve greater efficiency and internal efforts to improve pre- and post-trade transparency with regards to risk and margin optimisation as well as collateral management.

However, once data harmonisation is improved, progress will become exponential and the post-trade infrastructure across listed derivatives will be able to stand the next crisis.

The listed derivatives industry is on the right path and accelerating the pace of improvement. Collaboration is increasing to meet common challenges and to build a more sustainable and resilient market as volumes, and revenues, across the market continue to increase.

Download the full report ‘Futureproofing Derivatives Post-trade: Building Operational Resilience Across the Market’ here: https://www.acuiti.io/futureproofing-derivatives-post-trade