Capital markets unprepared for central clearing

More than half of capital markets participants may not be ready to centrally clear interest rate and credit default swaps, according to a recent poll.

Regulations such as Dodd-Frank aim to increase transparency and market efficiency in over-the-counter (OTC) derivatives trading, but a recent poll suggests the market may be ill prepared for the change.

SimCorp, a provider of investment management solutions and services for the global financial services industry, conducted a poll of nearly 60 executives from 34 capital market firms from around the world and asked respondents whether or not their firms are ready to centrally clear interest rate swaps and credit default swaps. While 41% answered yes, a 53% majority answered no.

“The fact that most investment management firms are not prepared for central clearing is not surprising,” said Paul Rowady, senior analyst at Tabb Group. “This is rooted in an overreliance on legacy and fragmented portfolio management systems which makes it difficult for firms to get the most basic information on the state of their business. Without the right technology in place, asset managers will continue to struggle, especially considering how OTC derivatives reform is only the first step in what will likely be a continuing overhaul of how firms address all securities and manage their exposures across an enterprise.”

When asked to share the largest challenges in processing derivatives, respondents cited cost, collateral management, intraday reporting, systems integration and regulatory compliance.

“Derivatives are complex instruments,” said David Kubersky, managing director of SimCorp North America. “Therefore, state-of-the art systems with accurate collateral forecasting, consolidated positioning-keeping to facilitate intraday reporting and automated workflows to support the entire trade lifecycle are absolutely essential for investment managers dealing with the tsunami of new regulations.”

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