The Q4 Sell-Side Clearing
Management Insight Report, produced in collaboration with report partner
HelloZero, focuses on streamlining futures and options data processing. This
quarter’s analysis delves into EMIR 3.0, CCP default risk, DORA, manual
clearing training, and the Basel III endgame impact.
A comprehensive
examination of reconciliations explores changes and remaining challenges in
reducing operational risk and enhancing efficiency and customer service since
the 2021 study on sell-side listed derivatives market reconciliations.
European regulators are
conducting a review of the EMIR framework, aiming to strengthen European
derivatives markets through central clearing of OTC instruments and reduce
reliance on third-country clearing houses post-Brexit.
The UK and EU, after agreeing on
equivalence to avoid regulatory disruptions, face a potential end to
equivalence in 2025. While the risk has diminished, market participants are
better prepared for a break, with 63% assuming it is disruptive but not
disastrous, signaling improved readiness compared to previous years.
EU Equivalence for UK CCPs: Source: Acuiti
The increased volatility in
various asset classes has heightened the risk of defaulting on trading
positions, prompting clearing firms to focus on Central Counterparties (CCPs)
and the potential of default fund contributions.
Concerns about clearing member
default risk are widespread, with 43% conducting significant reviews of all
CCPs and their default funds. Some are particularly focused on
smaller CCPs, susceptible to volatility in a narrower range of products.
Overall, 40% express no concern about default fund risk and are not conducting
CCP reviews beyond normal procedures.
CCP Default Risk, Source: Acuiti
Exchanges are increasingly aiming
to establish a direct connection with end clients rather than relying on the
traditional sell-side intermediary. This shift is driven by a desire to enhance
the visibility of who is trading on the exchange and to stimulate client demand
for new products and services.
While 55% of the network
acknowledges increased requests from exchanges for greater transparency and
visibility, concerns about the competitive threat from exchanges exist among
some, with almost half not entirely comfortable providing such information.
Post-Covid Reconciliation Priorities: Industry-Wide Improvements
The EU’s Digital Operational
Resilience Act (DORA), effective in early 2025, necessitates firms to map
third-party relationships and conduct extensive due diligence on digital supply
chains. Challenges in preparing for DORA
include operational resource allocation, understanding threat analysis
criteria, and obtaining information from vendors. Despite the compliance task’s
magnitude, a majority, 67% of the network believes they are on track for DORA
readiness, with varying levels of preparation.
DORA Implementation, Source: Acuiti
Banks,
alongside preparing for DORA, are anticipating the impact of the Basel III
endgame regulation. G-SIBs express concerns about potential increases in
regulatory capital requirements, with counterparty risk requirements identified
as having the most significant cost implications for clearing services. While
44% foresee cost implications, 25% of the network currently sees no significant
impact on the cost of clearing services from the Basel III endgame.
Since
March 2020, post the Covid-19
surge, clearing firms prioritized reconciliation system improvements. The 2021
Acuiti and HelloZero study highlighted industry-wide efforts, with a prevailing
“good enough” attitude, and reliance on manual processes, and
spreadsheets, especially among tier 1 banks.
In
the last two years, 39% of firms, including 44% of tier 1 banks, fully
automated reconciliation processes, focusing on day-to-day efficiency, cost
reduction, and resource allocation to higher-value tasks. Significant
investments in reconciliation software, driven by the goal of increasing
efficiency and capacity, have been made by over two-thirds of respondents.
Larger
firms have shifted investment focus from headcount to automation. Currently, 2%
predominantly use manual processes, 59% partially automate, and 39% fully
automated reconciliation for derivatives trades, showcasing widespread
integration of automated processes.
The
adoption of artificial
intelligence (AI) for reconciliation processes is in the early stages, with
58% of respondents in the investigation stage, 13% in early implementation, and
only 8% having fully implemented AI. This indicates a cautious approach to
leveraging AI to reduce dependencies, wage pressures, and operational
vulnerabilities in reconciliation systems.
Sell-side
firms in the derivatives industry have made significant strides in improving
reconciliation software efficiency since the 2021 Acuiti report. The use of
spreadsheets has decreased, automation has increased, and reliance on key staff
members has diminished.
While
not fully automated across the market, the continual investment in
reconciliations is positively impacting satisfaction levels, with over half of
respondents expressing satisfaction with their processes. However, intentions
to invest in reconciliation software are declining, with just under a fifth
planning to invest and over half not considering it, indicating a potential
risk despite the progress made since 2020.
The
network expresses optimism about the next three months’ business prospects in
derivatives clearing, with a sentiment score of 73, marking an increase from
the previous quarter’s score of 68. Among respondents, 18% are very optimistic,
and 55% are quite optimistic, while 27% remain neutral about the outlook.
Derivatives Clearing Business Performance. Source: Acuiti
Sell-side
firms in derivatives have improved reconciliation software efficiency, reducing
reliance on spreadsheets and increasing automation. While
progress is evident, achieving a fully automated environment remains ongoing,
emphasizing continuous investment.
High
satisfaction levels suggest positive strides, but declining intentions to
invest pose risks, including capacity issues in volatile markets. Maintaining a
competitive edge requires ongoing investment, recognizing reconciliations as
crucial for success. Despite challenges, the overall optimism about business
prospects for the next three months indicates a positive industry outlook.
The Q4 Sell-Side Clearing
Management Insight Report, produced in collaboration with report partner
HelloZero, focuses on streamlining futures and options data processing. This
quarter’s analysis delves into EMIR 3.0, CCP default risk, DORA, manual
clearing training, and the Basel III endgame impact.
A comprehensive
examination of reconciliations explores changes and remaining challenges in
reducing operational risk and enhancing efficiency and customer service since
the 2021 study on sell-side listed derivatives market reconciliations.
European regulators are
conducting a review of the EMIR framework, aiming to strengthen European
derivatives markets through central clearing of OTC instruments and reduce
reliance on third-country clearing houses post-Brexit.
The UK and EU, after agreeing on
equivalence to avoid regulatory disruptions, face a potential end to
equivalence in 2025. While the risk has diminished, market participants are
better prepared for a break, with 63% assuming it is disruptive but not
disastrous, signaling improved readiness compared to previous years.
EU Equivalence for UK CCPs: Source: Acuiti
The increased volatility in
various asset classes has heightened the risk of defaulting on trading
positions, prompting clearing firms to focus on Central Counterparties (CCPs)
and the potential of default fund contributions.
Concerns about clearing member
default risk are widespread, with 43% conducting significant reviews of all
CCPs and their default funds. Some are particularly focused on
smaller CCPs, susceptible to volatility in a narrower range of products.
Overall, 40% express no concern about default fund risk and are not conducting
CCP reviews beyond normal procedures.
CCP Default Risk, Source: Acuiti
Exchanges are increasingly aiming
to establish a direct connection with end clients rather than relying on the
traditional sell-side intermediary. This shift is driven by a desire to enhance
the visibility of who is trading on the exchange and to stimulate client demand
for new products and services.
While 55% of the network
acknowledges increased requests from exchanges for greater transparency and
visibility, concerns about the competitive threat from exchanges exist among
some, with almost half not entirely comfortable providing such information.
Post-Covid Reconciliation Priorities: Industry-Wide Improvements
The EU’s Digital Operational
Resilience Act (DORA), effective in early 2025, necessitates firms to map
third-party relationships and conduct extensive due diligence on digital supply
chains. Challenges in preparing for DORA
include operational resource allocation, understanding threat analysis
criteria, and obtaining information from vendors. Despite the compliance task’s
magnitude, a majority, 67% of the network believes they are on track for DORA
readiness, with varying levels of preparation.
DORA Implementation, Source: Acuiti
Banks,
alongside preparing for DORA, are anticipating the impact of the Basel III
endgame regulation. G-SIBs express concerns about potential increases in
regulatory capital requirements, with counterparty risk requirements identified
as having the most significant cost implications for clearing services. While
44% foresee cost implications, 25% of the network currently sees no significant
impact on the cost of clearing services from the Basel III endgame.
Since
March 2020, post the Covid-19
surge, clearing firms prioritized reconciliation system improvements. The 2021
Acuiti and HelloZero study highlighted industry-wide efforts, with a prevailing
“good enough” attitude, and reliance on manual processes, and
spreadsheets, especially among tier 1 banks.
In
the last two years, 39% of firms, including 44% of tier 1 banks, fully
automated reconciliation processes, focusing on day-to-day efficiency, cost
reduction, and resource allocation to higher-value tasks. Significant
investments in reconciliation software, driven by the goal of increasing
efficiency and capacity, have been made by over two-thirds of respondents.
Larger
firms have shifted investment focus from headcount to automation. Currently, 2%
predominantly use manual processes, 59% partially automate, and 39% fully
automated reconciliation for derivatives trades, showcasing widespread
integration of automated processes.
The
adoption of artificial
intelligence (AI) for reconciliation processes is in the early stages, with
58% of respondents in the investigation stage, 13% in early implementation, and
only 8% having fully implemented AI. This indicates a cautious approach to
leveraging AI to reduce dependencies, wage pressures, and operational
vulnerabilities in reconciliation systems.
Sell-side
firms in the derivatives industry have made significant strides in improving
reconciliation software efficiency since the 2021 Acuiti report. The use of
spreadsheets has decreased, automation has increased, and reliance on key staff
members has diminished.
While
not fully automated across the market, the continual investment in
reconciliations is positively impacting satisfaction levels, with over half of
respondents expressing satisfaction with their processes. However, intentions
to invest in reconciliation software are declining, with just under a fifth
planning to invest and over half not considering it, indicating a potential
risk despite the progress made since 2020.
The
network expresses optimism about the next three months’ business prospects in
derivatives clearing, with a sentiment score of 73, marking an increase from
the previous quarter’s score of 68. Among respondents, 18% are very optimistic,
and 55% are quite optimistic, while 27% remain neutral about the outlook.
Derivatives Clearing Business Performance. Source: Acuiti
Sell-side
firms in derivatives have improved reconciliation software efficiency, reducing
reliance on spreadsheets and increasing automation. While
progress is evident, achieving a fully automated environment remains ongoing,
emphasizing continuous investment.
High
satisfaction levels suggest positive strides, but declining intentions to
invest pose risks, including capacity issues in volatile markets. Maintaining a
competitive edge requires ongoing investment, recognizing reconciliations as
crucial for success. Despite challenges, the overall optimism about business
prospects for the next three months indicates a positive industry outlook.