White Paper

THE MODERNIZATION OF CLEARED DERIVATIVES

The derivatives business has come under intense pressure over the last decade. Consistently stable and low interest rates have put downward pressure on overall profitability, while increased regulatory requirements has raised operating complexity and costs. At the same time, ongoing market uncertainty surrounding geopolitical events, such as Brexit, demand that firms consider major changes to their business within a very short timeframe.

The derivatives business is at a point of inflection and standardization; consistency of operating models and investment in automating processes wherever possible is the natural evolution. Automation and innovation will be key drivers on industry-wide mandates and the business operation methodologies that emerge. In short, the status quo will be insufficient for any firm that wants a profitable and competitive derivatives business.

What business aspects can firms change to respond to the mounting pressures? Where should they focus to reduce and control costs? How can they improve operational efficiency, while ensuring they’re prepared for the future?

This white paper takes a closer look at:

• Current market forces influencing the derivatives landscape

• What the future holds for derivatives processing

• Where firms should focus to address current challenges and prepare for future changes

Derivatives processing today

Regulations, such as Dodd-Frank, Basel lll and, most recently, MiFID, have all increased capital costs for firms. As a result, nearly every futures commission merchant (FCM) or broker-dealer faces identical internal pressures: Provide a good return on capital, reduce costs and determine how to contain them long-term, so growth and competitive advantages can be pursued.

The pressures in derivatives are so prevalent that many FCMs have opted to exit the business completely over the last 15 years. In 2005, there were more than 180 FCMs in the United States (U.S.). Today, there are fewer than 80. Brokers that remain are now under intense pressure to be operationally efficient, while reducing risk and keeping up with never-ending regulatory change. While tools that enable automation and eliminate process redundancy can ease some pressures, remaining competitive in today’s derivatives world demands that firms integrate both middle- and back-office functions across listed and cleared OTC derivatives to prepare for their biggest challenges and opportunities ahead.

“Capital rules changes impact the appetite firms have for their clearing businesses, and this really impacts how the market will evolve,” says Andrew Whyte, FIS group president, Post Trade Services. “Many large commercial/universal/investment banks, for example, may know they won’t win substantial market share for their prime business through derivatives clearing. Yet, they cannot afford to not offer the services, as it reduces their ability to win other prime business in securities processing and add-on business, such as financing or advisory. While they may not be able to lead the market, they still need to be in the business. These firms really need to look at costs associated with non-core and even, loss-making, but essential parts, of their prime franchise.”

In addition, firms need to ensure they’re prepared to offset the continued push of OTC derivatives into centrally cleared venues, increased regulatory hurdles and the cost of keeping up with technology innovation.

Moving forward, Alun Green, managing director, Post Trade Services, FIS, predicts that technology will be increasingly disruptive in the derivatives landscape. It will allow new clearing models to develop – and the impact will be profound. “We can expect to see a move to consolidation for economy of scale even while niche, value-add markets are developing,” says Green. To respond to these changing market forces, Green says existing clearers will need to innovate to keep up with the market, or risk being unprofitable and, potentially, obsolete.

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Looking ahead

While preparing for the future of derivatives processing requires strategic planning for all firms, those who take a proactive stance are empowered to address the current challenges associated with costs and inefficiency and embrace a competitive advantage. To assess which areas might offer the greatest impacts for improvement, consider the following questions:

1. How are you responding to real-time demands?

It’s time to say goodbye to end-of-day batch processing.

Today’s expectation is a transparent, real-time view of

positions and data flow and an advanced self-service

capability for customers. Firms must have both the enabling

technology, and a rules-driven and exception management

model that can really deliver.

While an increasing number of forward-looking firms are using

real-time intraday margin data to better communicate with

customers, manage collateral and support new products,

such as OTC and cryptocurrency derivatives, doing so requires

a strategy that makes sense from both a capital and cost

perspective. Firms should consider whether tech investments

address and support the full scale of their derivatives business

– not just part of it.

2. Are you leveraging automation to your advantage?

Firms that use technology to enable automation and machine

learning can reduce costs, eliminate the need for manual

intervention and optimize processes for better use of human

capital. In addition, the right technology may provide

additional value, such as real-time views of critical data,

including margin or position limit alerts and improved

straight-through processing rates that can be leveraged

across various teams.

Firms should also consider how their technology equips them

to deal with new challenges, such as increased volatility, new

products or demanding customers, and whether it positions

them to use innovation to differentiate. A firm that positions

itself as consistently among the first to market to allow

customers the ability to use new products and innovations, for

example, can carve out new opportunities to drive growth.

3. Are you proactively eliminating unfunded mandates?

Firms are under intense pressure to not only reduce costs,

but to eliminate cost uncertainty. However, this is nearly

impossible to do if a firm’s systems are not well integrated.

A technology infrastructure that is operationally inefficient

prevents opportunities to streamline and requires an

increasing amount of staff support. “Knowledge of end-to-end

processes has become diluted with the move to functional

operational silos. Technology stacks are understood by few

and have a lot of legacy development,” says Green.

Eventually, firms that don’t address the cost challenges

associated with their infrastructure face the risk of crumbling

to the cost pressures associated with the ongoing design

and maintenance that their disconnected systems require,

particularly in a complex regulatory environment. In

response, firms are now considering how they can reduce the

infrastructure to achieve more cost control.

Some are combining systems to eliminate unpredictable

expenses that come with ongoing regulatory changes

and systems management, and some are embracing new,

integrated solutions from vendors that cover a wider scope of

the end-to-end process, allowing them to move away from the

disjointed system flow they have today and toward a common

data model.

Firms that make the leap are finding improvements in the cost

of change, quality of data and operational efficiencies that

allow them to focus on value-added activities that enhance

products and improve customer experience.

“The Readiness Leaders are the businesses that early on got the message that they need to invest in technologies such as automation because they would serve as a foundation for other types of change,” argues Harry Stahl, director of strategy and solutions management at FIS. And the difference between the Leaders and the rest of the industry are stark.

83%Broker-dealer Readiness Leaders

40% Rest of industry

We are close to fully automating the back office

Source: FIS Readiness Report 2019

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FIS Cleared Derivatives – your strategic solution for post-trade derivatives

As a trusted provider of post-trade derivatives solutions for more than 20 years, FIS is uniquely positioned to leverage its middle- and back-office systems, global team of subject matter experts and unparalleled network of client firms to deliver a solution that meets the challenges facing post-trade customers.

Forward-looking organizations that are ready to move from end-of-day batch processing to true, straight-through derivatives processing no longer need to endure a high-risk, multi-year, “big bang” conversion, or the ongoing maintenance associated with it, to complete the journey. As a fully integrated, real-time, post-trade processing solution, FIS Cleared Derivatives represents the quickest way to modernize, without risk, for improved bottom-line results.

This comprehensive offering of technology and managed services is designed to rapidly transform post-trade functionality, including real-time responsiveness, middle- and back-office integration, and the latest innovations in cleared derivatives processing.

FIS has significantly invested in a reimagining of the post-trade middle- and back-office that has become the FIS Cleared Derivatives solution. FIS Cleared Derivatives is the FIS strategic post-trade solution replacing Clearvision (Middle-Office/Trade Clearing), GMI and UBIX (Back-Office) functional coverage and expanding core post-trade functionality to previously uncovered functional areas.

Our next generation offering has been designed at the outset to support both middle- and back-office functions across exchange-traded and OTC cleared derivatives that can be deployed in a phased and modular approach based on your priorities.

Battle-tested by FIS’ own derivatives and operational experts, in conjunction with major market players, FIS Cleared Derivatives seamlessly fits into any processing infrastructure. Backed by FIS’ automated testing and continuous delivery framework, time to market is compressed, and ROI is accelerated.

It’s your choice – you can take a modular approach. The modularization of FIS Cleared Derivatives not only allows you to mitigate the risk and reduce the cost that would be associated with the conversion of your full back-office all at once, but also allows you to start leveraging FIS’ new technology for specific functional areas earlier.

34%of investment banks struggle to deliver support services for derivatives

55%of larger broker-dealers plan significant investments in digital access

New services and online access top the agenda

Source: FIS Readiness Report 2019

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The modular platform includes these core components:

More than just tech

Offering more than just technology or operational processing, FIS has dedicated teams of experts with a deep understanding of the work required to keep up with regulatory and mandatory market changes. All regulatory and mandatory exchange/CCP work, from requirements to design to build to comprehensive testing, is included in the solution.

With a modular, all-in-one solution available on a real-time, scalable platform, FIS’ Cleared Derivatives contains everything it takes to increase operational efficiency, mitigate risk, reduce total cost of ownership and extend functionality in line with enterprise goals and changing market conditions.

Now you can adjust and evolve – with scale, efficiency and cost control – backed by the full support of our proven team in more than 80 global markets.

Change without complexity. Modernization without risk. It’s time to take a closer look at FIS Cleared Derivatives.

Margin, Risk and Collateral

Margin Advisor is an award-winning, SaaS solution that provides mission-critical software, data and services for performing real-time and what-if margin calculations by replicating exchange requirements on demand, while also eliminating technical support and maintenance expense.

Cash & Collateral Management is an integrated solution that provides enhanced margin call processing, bringing advanced workflow for issuance and tracking, customizable call calculation and exception-based processing for all major Central Counter Parties (CCPs) and exchanges.

Middle Office

Trade Clearing is a next generation middle-office solution that leverages best-of-breed functionality, such as automated trade clearing support for core matching and post-trade processing; real-time clearing house connectivity; integration of broker files, client allocations and downstream systems; and a trade allocator for upstream processing.

Trade Allocator extends functionality from core trade clearing to maximize straight-through processing efficiencies. An end-to-end allocation workflow and allocation rules engine, Trade Allocator takes middle-office efficiency to the next level.

End of Market and Back Office

Position Manager is an automated position reconciliation and closeout between the back office and the CCP.

Reconciliations, a comprehensive, fully automated reconciliation solution provides Total Equity reconciliations of ETD and OTC derivatives.

Back Office is a true next generation back-office system based on real-time calculations, user-driven workflow, dynamically scalable processing and advanced analytics to reduce operating costs and dramatically increase straight-through processing of cleared derivatives.

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About FISFIS is a leading provider of technology solutions for merchants, banks and capital markets firms globally. Our 55,000 people are dedicated to advancing the way the world pays, banks and invests by applying our scale, deep expertise and data-driven insights. We help our clients use technology in innovative ways to solve business-critical challenges and deliver superior experiences for their customers. Headquartered in Jacksonville, Florida, FIS is a Fortune 500® company and is a member of Standard & Poor’s 500® Index. To learn more, visit www.fisglobal.com. Follow FIS on Facebook, LinkedIn and Twitter (@FISGlobal).

©2019 FIS

FIS and the FIS logo are trademarks or registered trademarks of FIS or its subsidiaries in the U.S. and/or other countries. Other parties’ marks are the property of their respective owners.

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