The Gateway to Algorithmic and Automated Trading

For venues and vendors, the new architecture gets competitive juices flowing

Published in Automated Trader Magazine Issue 37 Summer 2015

While so much of the focus on the new postcrisis infrastructure has been about how market participants can adapt, the changes represent enormous challenges and opportunities for other types of firms as well. For both venues and vendors, the new architecture has led to fierce competition.

Henri Bergstrom, Nasdaq

Henri Bergström, Head of Product Management, CSD Technology, Nasdaq

Henri Bergstrom, head of product management for CSD technology in the Market Technology division at NASDAQ, notes that infrastructural firms themselves will need to make substantial investments.

"Europe is moving towards a single regulation on CSDs with a high level of standardisation and that also takes into account global policies such as those of CPMI/IOSCO and ISO. This, together with T2S, will certainly require CSDs to make some very significant investments in technologies and operations. This could extend to their customers' back-office and sometimes even to the middle-office," Bergstrom said.

Even with standardisation, there will be issues as a result of timing.

"The challenge will be that different CSDs will introduce these changes in different stages. And they will need to find ways to recoup the investments. CSD (Regulation) and T2S themselves will not bring any new revenue streams but will increase the costs. Both of them, however, will provide CSD's and their participants with new opportunities to make the best use of the new structures and technology," Bergstrom said.

For example, he noted the shortening of settlement cycles as well as the opportunity for auto-collateralisation under T2S allowed for reduced liquidity costs. "In T2S, further new opportunities arise for asset servicing, collateral management and portfolio pooling. In addition, market and communication standardisation will allow for greater STP and reduced operational costs."

Bergstrom's colleague, Fredrik Sjöblom, head of post-trade solutions in the Market Technology division at Nasdaq, said EMIR introduced strict, detailed requirements for margining, stress testing, collateral and segregation, among others.

"All of them are aimed at ensuring CCPs are robust and that their clients are protected from systemic risk," Sjöblom said. "This combined with the increased focus on cost of capital creates a number of technical challenges for CCPs. These are mostly around risk and collateral management, including the need for analytical capabilities to validate the models and processes."

As a result, CCPs will need to devote considerable focus to their own technology as clients will be looking to get the most bang for the buck.

"When choosing a CCP, market participants will want the most beneficial solution when it comes to the cost of capital, fees and processes. They will also make decisions based on the robustness of a CCP and that's because clearing members and CCPs will need to share risk in the case of a default," Sjöblom said.

While the OTC market has hogged the limelight thus far, other market areas will soon start to get increased attention.

"So far, the increased competitive for CCPs has centred on OTC clearing and the cash CCP space. However, as MiFIR/MiFID II approaches, the competition on exchange-traded derivatives will most likely increase as well," Sjöblom said.

In addition to venues, vendors are trying to gain a business foothold from the infrastructural changes, particularly around trade reporting.

Chris Smith, Head of Post-Trade Services, Trax

That cottage industry is driven by consultants seeking to attract clients by offering to interpret not only the rules but also how firms' systems, processes and procedures should change to meet the rules."A sort of cottage industry grows up around the reporting rules and other new regulations," Chris Smith of Trax said.

Ultimately, this brings the Trax executive back to the theme of collaboration.

"The thing that I think is lacking and something that we're keen to work on with our customers is bringing everyone together," he said. "The collection of knowledge - if you share the knowledge across 5, 6, 7, 8, 10, 12 banks - has got to be better than everybody individually in their own firms trying to interpret what they need to do. That's an important first step, one we're now engaging on with our clients. I still don't think it's complete yet, the level of regulatory scrutiny and fines and requests for changes by the regulators is still too high in any regard."