WS1

WS1
Showing posts with label guarantee. Show all posts
Showing posts with label guarantee. Show all posts

Wednesday, August 13, 2014

CLEARING ENTITIES – WHEN ARE THERE TOO MANY?

It seems that every week there’s an announcement of a new clearing entity supporting a market or product. Clearing is critical and provides safety and risk mitigation for market participants. But I wonder if there can be too much of a good thing?

Granted, clearing is a basic requirement of a sound financial services industry, and should address trade matching, collection of initial and variation margin and the clearing entity acting as the Central CounterParty. But is forming a new clearing entity the most effective approach?

In a market without a clearing entity, one is needed to provide critical services. This often requires regulatory changes, perhaps on a national scale, to begin the process. The local infrastructure must be in a position to support this process. This includes funding and contributing the expertise to define the processing and control functions. This is a heavy burden for an emerging or pre-emerging market to undertake.

Perhaps leveraging the expertise of an existing clearing organization, rather than creating a new entity, is a better alternative. This would permit clearing services to be made available faster and potentially with less pain and expense usually associated with forming a new entity. The potential benefits of this approach are considerable as it would reduce the costs associated with development and encourage the use of clearing in new markets.

Further along this line, I question why new clearing entities are being formed in markets where there is an existing entity already providing clearing services.  Are clearing services for one product substantially different from another product?  Are there benefits of using an existing platform?

If there are legislative or regulatory issues that demand a new entity, the industry should appeal this situation as it results in a fragmented clearing process. Additionally it requires firms to join multiple entities, support redundant interfaces and holding positions and balances across multiple entities all which results in increased costs.

Perhaps some products can’t be co-mingled or require unique processing streams and / or reporting.  Or segmentation may be required to mitigate associated risks. This can be addressed via a holding company structure where different processing streams within a clearing entity would maintain the required segmentation.

The old approach of “cloning” an existing infrastructure, to support a new requirement, has been the “go to” approach for financial services firms for far too long. As seen many times, this seemingly simple approach is costly in the long run with multiple interfaces, maintenance of different but similar applications and processing multiple processing streams.

Once in-place these cloned systems are almost impossible to replace or eliminate due to the ever evolving demands for new products, faster processing or new markets.
Fewer clearing entities will flatten the landscape and reduce fragmented processing streams. It will also support cross-margining and improved collateral management. In the future fewer clearing entities will ease the transition to global interfaces among clearing entities.

So, when will we learn from the hard lessons and modify our approach to the never-
ending demands of the industry?

What is your opinion about this?

           Are there other viable approaches available?

                 How many clearing entities memberships does your firm have?


Thursday, January 30, 2014

CENTRAL COUNTER-PARTIES (CCP) – HOW MANY ARE NEEDED?

With the global focus on reducing counter-party risk the number of central counter-parties has increased in recent years. CCP play a major role in ensuring safe markets and best practices. Their primary purpose is to mitigate risk between trade counter-parties. CCP traditionally provide a broad range of services to support their members. These services may include; trade reporting, trade comparison, collection of margin or clearing deposits.  

As new regulations take effect there may be an increase in the number of CCP.  The industry relies on the CCP to ensure that counter-parties perform as expected. The CCP becomes a critical component during market price swings, asset class scandals and CCP members face market, internal operational or technology challenges. CCP require broad business expertise and technology platforms to enable their ability to recognize, address, contain and resolve these challenges before the “knock-on” impact on CCP other members?

The industry, as well as regulators, continues to address these as well as other issues. It would be helpful for all market participants and regulators to identify and address these issues on a proactive rather than reactive basis.


What’s ideal CCP ratio for a marketplace, transaction or asset class?

Should the costs associated with a CCP be an issue?

What other CCP related issues are you concerned about?

Tuesday, September 10, 2013

BUY-SIDE - LEFT OUT IN THE COLD

Why has the Buy-side been left out of a process that reduces transaction volumes and protects the securities industry via time-tested risk mitigation processes?

That the buy-side doesn’t participate in the post trade date process, that protects street-side participants and ensures timely and accurate settlement, is an oversight by the industry as well as the regulators. Post trade processes evolved, from the early 1970’s, originally driven by the paper work crunch of the late 1960’s. Today these processes ensure that the industry is safe and capable of supporting substantial growth in trade volumes. These processes include trade comparison, trade netting and settlement.    

But the infrastructure only protects the street-side which leaves buy-side participants outside the process. In turn this exposes the street-side to risk of settlement failures and the need to process additional transactions volumes.

There are alternative methods of buy-side participation; one where the investor would become a member and participate directly. Another is having the investor’s Custodian or Prime Broker represent the investor and participate on their behalf. Both alternatives would require some accommodation by the industry infrastructure and the Buy-side but it would be a “win-win” for everyone.

What are your thoughts?

Do you agree…..or…… disagree?

                             What are the benefits or disadvantages?