The first ISS Post Trade Technology conference was a small but perfectly-formed occasion, down at the Hilton in Canary Wharf (sponsored by my friends at Volante amongst others). Thanks to an excellent question from one of the moderators, it seemed that the make up of the room was approximately one half sell side, one half service providers, and one person from the buy-side.
Lord Triesman gave the opening speech, which proceeded sedately through the seas of
eurozone woes, regulation and the banking industry; rather like the migrating blue whale in the Pacific, one knows it was there, but not much else about it.
Collateral Optimisation
The panel talk on Collateral Optimisation was excellent. One of the consequences of the move of OTC trades to CCPs is that there is suddenly a huge new requirement for initial margin, which means collateral is about to become a scarce resource (one person estimated that the 5-10% initial margin for OTC trades that move to CCPs will take $10 trillion off the table globally). Anyone wanting to stay OTC, and post initial margin to a third party, will find the initial margin requirement to be 2-4 times that of the CCPs, which means it is all going to go to the CCPs.
So what does collateral optimisation involve? Answers included:
– getting a global picture of available collateral accross asset classes- managing the different collateral requirements for each CCP
– being able to move unused collateral from one location (Asia) to another (Europe) when
markets close in the first location
– a rise in trades which are done purely to increase the quality of available collateral
One vendor estimated that Tier 1 firms will build this infrastructure, the buy-side will out-
source, and that Tier 2 firms will find it difficult. The upside of the move to high-quality assets, is that it may decrease the capital adequacy requirements of Basel III.
High Frequency Trading
Clive Triance of Penson gave an excellent presentation after the coffee break. The frictional cost of trades in Europe is 18x what it is in the US. High frequency trading is not here yet, but it is coming. At the moment it accounts for 30% of Europe’s trade flow – but it will be 65-70% in five years’ time. 90% of HF traders out-source their post-trade technology. There needs to be an execution service and an all-in clearing service, and UBS, for instance, are building something like this. The lesson for execution brokers is that they need to make themselves more sticky.
In the break, had an interesting chat from the man from Sungard. Servicing 165 different exchanges is clearly a challenge. Was also not the first vendor to talk about spending a lot of money to be ready for some new regulatory or exchange initiative, only for that initiative to be scrapped leaving a lot of wasted effort, which leads us on to T2S.
T2S
The most interesting part of the T2S discussion was really the sheer scale of the project, and how far out the time-scales are. Helmut Wacket from ECB reported expenditure of 135m Euros to date, with projected final cost of 400m by 2015. Projected cost savings are about 200-250m Euros per year accross the industry, although there was definitely an air of uncertainty in the room around this. Interesting quote from CEO of a large futures exchange, as reported by of Jeremy Grant of FT Trading Room – “I feel like I’m being water-boarded by regulation”
There was also a ‘Meet the Vendors’ panel on outsourcing – there was general agreement that one of the vendors’ main concerns these days is whether their clients will still be in business in a year’s time. And also some frustration at the time it is taking to get the green light for new projects, no matter how strong the business case.