After the 2008 financial crisis, clearinghouses were designated as systemically important financial institutions, and global regulators raised the bar in terms of these entities’ risk management roles and responsibilities. Meeting their obligations under the new regime is a tall order. They not only have to review and revise existing processes and legal agreements, but they also have to take a hard look at the ability of their technology to support the business.
Clearinghouses around the world are coming to the same conclusion. Their legacy systems are going to struggle to keep up with the new, more stringent demands. They need something totally new – a system designed from scratch.
Here’s why. Margin models are becoming more advanced with the introduction of OTC Clearing. Clearinghouses are moving toward portfolio-based margin models such as Value at Risk (VaR), and at same time, the regulators require intraday margin calculation. Legacy technology is struggling to cope with the increased performance requirements.
Real-time risk monitoring is equally important as fast, accurate risk calculation. Clearinghouses need to be more sophisticated in monitoring risk to reflect their systemic importance in the financial markets.
Another factor comes into play as well. Firms trading through exchanges have to put up more capital for clearing, so it’s imperative to look for opportunities to optimize through cross-margining.
Unless clearinghouses have resilient, scalable technology, they will not be equipped to compete in the new environment. In addition to having the capacity to do real-time calculations, monitoring and alerts, their systems have to be able to aggregate data and display information in a visual format on a dashboard. That’s what enables fast, effective decision making.
To illustrate, the Australian Securities Exchange (ASX) is now going through a multi-year technology transformation process. It decided the best way forward is to consolidate systems and deploy a single risk platform – Nasdaq’s Sentinel Risk Manager in the equities and derivatives clearinghouses That way ASX can measure risk consistently, quickly and accurately across all listed and OTC asset classes. It can drive revenue by offering a cross-margin simulation and optimization service to member firms. It can save operationally by retiring older systems that are expensive to maintain. Moreover, it can show the regulators that it has implemented global best practices in risk management.
We expect more clearinghouses to follow in ASX’s footsteps. Upgrading to newer platforms will allow them to achieve the highest risk management standards, meet global regulatory obligations and provide protection and efficiencies to customers, investors and the wider market.
Malcolm Warne, Development, Post-Trade Risk Technology for Nasdaq’s Market Technology Business