Arguments are not usually solved by technology. Case in point was the recent media furor over Nigella Lawson, whereby a couple of exclamatory emails from her ex-husband, advertising mogul Charles Saatchi, led to her being cross-examined about alleged drug use while acting as a witness in a trial
Arguments are not usually solved by technology. Case in point was the recent media furor over Nigella Lawson, whereby a couple of exclamatory emails from her ex-husband, advertising mogul Charles Saatchi, led to her being cross-examined about alleged drug use while acting as a witness in a trial.
But technology can fix problems when it comes to portfolio reconciliation.
A Celent report on the topic commented that, while reconciliation has usually been reactive and driven by disputes, the trend in the last few years has moved the industry in a different direction.
In the report, Portfolio Reconciliation for Derivatives Markets: Well Begun Is Half Done, Celent studied the growing importance of portfolio reconciliation and how firms are trying to make the best of what has been an “operationally challenging” few years.
“Firms have strengthened their operational capabilities as technology has advanced, and regular reconciliation is becoming an important means of reducing risk as well as meeting regulatory requirements.”
In an email interview with the International Swaps and Derivatives Association (ISDA), the association stated that following new regulation in both the US and Europe, firms are now required to perform portfolio reconciliation.
“Prior to the new regulation coming into force, the industry made great efforts via the regulatory voluntary commitment process to increase the frequency of portfolio reconciliation across the industry.”
But the association disagreed with the statement that “reconciliation has usually been reactive”, stating that the industry “was making great efforts” to proactively enhance and ensure robust risk management via portfolio reconciliation pre-2008.
“The introduction of mandatory portfolio reconciliation may have increased the frequency of portfolio reconciliation in some instances, however the regulation for the majority of industry players was just a continuation of business as usual.”
The association has a portfolio reconciliation focused working group that it stated as meeting regularly to discuss any issues that the industry is seeing and to find industry wide solutions.
Both the US Commodity Futures Trading Commission (CFTC) and the European Securities and Markets Authority (ESMA) used the framework that the industry had already devised as a baseline for the new regulation.
ISDA assisted the industry by publishing protocols in both the US and EU to cover the legal requirements, for example, agreeing portfolio reconciliation terms ahead of entering into a trade under the European Market Infrastructure Regulation (EMIR).
It also issued an operation best practice for portfolio reconciliation for the purposes of EMIR at the request of its members which is available on the EMIR focus page—guidance, it said, that helped counterparties to identify which terms should be reconciled on a best practice basis in light of “limited prescriptive guidance from ESMA”.
Driving the machine
The drivers towards automating reconciliation seem to be threefold, and consist of regulatory pressure, oversight, and cost.
The practice is crucial, said Celent, because it allows firms to obtain a better overview of the trading function. “Regulation has been a driver, as has legacy platform rationalisation, with firms relying on automation and streamlining of their reconciliation platforms. Having a number of legacy platforms across the trading function makes it difficult for firms to run their compliance optimally. Finally, in a tough economic environment, cost minimisation is becoming a mantra across the board.”
ISDA could not provide details as to when vendors had been offering automation from, or an estimate of how many portfolios are reconciled. It gave only one reason for automation: to improve business efficiency.
Susan Hinko, the global head of industry relations for TriOptima, discussed how the firm launched its solution triResolve in 2006, as a portfolio reconciliation service working with the sell-side banks.
The portfolio reconciliation and dispute resolution obligations imposed by EMIR had US deadline dates of 15 September and 23 August 2013. But, Hinko said, a lot of the market hadn’t had to reconcile their portfolios until 15 December, because they work quarterly.
She added that the new regulations requiring financial institutions (FIs) and non-FIs to reconcile OTC derivatives had led to a spike in firms using triResolve, with more than 7 million trades being reconciled regularly through the service.
“US firms do not have the same reporting requirements, and it is only a sub-section of the market that has to deal with them—swaps dealers mainly—but from their requirements comes a knock-on effect to the rest of the industry.”
In Asia, there is no requirement but again, there would be a knock-on effect—for example, J.P. Morgan telling Japanese banks that in order to trade with the US they have to follow the requirements.
ISDA has really taken the initiative, said Hinko. More than 6000 members signed up to the association’s EMIR protocol, which enables parties to amend the terms of their protocol covered agreements to reflect the portfolio reconciliation and dispute resolution requirements imposed by EMIR, as well as to include a disclosure waiver to help ensure parties can meet the various reporting and record keeping requirements under EMIR without breaching confidentiality restrictions.
Hinko also pointed to the ISDA working group in Asia as using automated reconciliation, and that firms had recognised significant benefits. It is just up to the rest of the world to follow suit, and realise that technology can be the solution, rather than the problem.
