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Sell-side makes significant progress on derivatives clearing capacity and give-ups

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Derivatives clearing banks’ post-trade systems performed significantly better during the volatility of Q1 2022 when compared to their performance during the initial outbreak of the Covid-19 pandemic, despite being tested with higher volumes, a study by Acuiti has found.

The findings of the study are published in the most recent edition of the Clearing Management Insight Report, a quarterly survey of senior sell-side executives from across the global clearing industry. This quarter’s report was produced in partnership with SmartStream, a specialist in financial transaction management solutions space that offers solutions that enable firms to improve operational control, reduce costs, build new revenue streams, mitigate risk, and comply more quickly and accurately with regulations.

In April 2020, an Acuiti report found that over 60% of the sell-side experienced significant challenges with back-office processing and reconciliations during the February and March primarily due to the volatility associated with that period. The “give-up” and allocations process was also severely strained with a significant number of trades remaining unmatched for days.

This quarter’s Acuiti Clearing Management Insight Survey found that 86% of respondents thought the give-up process delivered better results now than in 2020, with 14% responding that it performed significantly better. 

A similar picture can be seen in allocations, with 74% of respondents stating that the allocation process performed better in 2022, and of those monitoring GCM back office systems, 78% felt they experienced fewer issues than in 2020.

According to FIA data, the spikes in volumes experienced during this year’s Q1 volatility were much higher than in 2020. Additionally, the total volume of give-ups was 52% higher this year. 

Liquidity, however, came under more pressure in February and March of this year with 39% of respondents saying that liquidity in the markets they covered was worse than in 2020. Additionally, there are still issues with the pro-cyclicality of CCP margins as shown by 43% of all respondents reporting a worse experience in 2022.

The challenges of fragmented reference data symbologies have been a key issue in the derivatives markets for decades. In this quarter’s report, Acuiti and SmartStream provided a deep dive into reference data and the difference it can make. 

This report finds that for over half of all respondents, and for 75% of tier 1 banks, reference data errors continue to be a regular cause of trade breaks.

However, the point of weakness for reference data fragmentation is now seen to be more from outside sources than within the organisation. Internally, the sell-side has become much more efficient in normalising reference data and the study found that only 20% of respondents saw moving data between internal systems as very challenging. 

A greater challenge is cross-industry normalisation. Just 11% of respondents reported no challenges in standardising data received from exchanges and CCPs and only 8% found receiving data from clients problematic.

The report also further analyses the challenges firms face and explores how firms are currently processing data management as well as the gauging of attitudes and challenges endemic to the development of a single source of reference data across the market.

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