People in The Trade

Reassessing risk

With changes to over-the-counter (OTC) derivatives trading and clearing approaching in the US and Europe, Hamish Purdey, CEO of technology provider FFastFill, has seen buy- and sell-side firms boost their risk analysis capabilities.

“In the last couple of years we’ve seen more interest in our risk management products. Despite being primarily a broker tool, an increasing number of buy-side clients want to know their full standardised portfolio management of risk (SPAN) margin,” says Purdey.

The difference in risk profiles of OTC and listed derivatives will force trading desks to monitor risk in real-time, to ensure they hold enough collateral against their positions, which Purdey sees as a major driver behind firms using data to optimise derivatives trading strategies.

FFastFill provides international front, middle and back office technology through software-as-a-service (SaaS) solutions, in addition to risk monitoring functions, primarily for derivatives trading.

Soon, major changes to derivatives clearing will come into force as part of efforts on both sides of the Atlantic to add clarity to the opaque derivatives market, which regulators believe exacerbated effects of the 2008 financial crisis.

Europe-wide EMIR regulation will force OTC derivatives to be cleared through central counterparties (CCPs), with similar rules coming into force in the US through legislation in the Dodd-Frank Act.

These changes constitute the most rigorous regulatory activity the derivatives market has ever seen, and firms like Purdey’s FFastFill will have to amend technology to fit the new rules.

FFastFill derives 90% of its revenue from firms engaged in exchange-traded derivatives, and Purdey hopes to leverage the company’s experience in listed derivatives to help clients ride the impending wave of new regulation.

“The trend we’re seeing is that fees will go up, especially as regulatory change occurs, forcing reporting and compliance costs upwards. Having the ability to connect to multiple brokers over one network, while meeting regulatory needs, will save buy- and sell-side firms money and integration time,” says Purdey.

To ensure the firm is allocating development resources appropriately, FFastFill regularly engages with the Commodity Futures Trading Commission (CFTC) through industry bodies to see how exactly it and its clients will be affected.

“Balancing client wishes creates constant challenges for all software companies in regards to customer and strategic initiatives, especially in environments of significant regulatory change such as now,” says Purdey.

A major trend crystallising among brokers is the move to outsource front-, middle- and back-office systems, which may offer operational advantages the buy-side should be aware of, according to Purdey.

“Having one central technology platform means upgrades can be quicker and more reliable than in-house resources while avoiding version control issues,” he says.

Platforms like FFastFill’s also look to extend their network by creating strong links between buy- and sell-side users, which in turn attracts further clients as the web widens.

“Sell-side attitudes are changing regarding outsourcing and there is a clear trend of companies looking to further outsource technology operations and focus on their core business,” says Purdey, who belives the sell-side will increasingly turn to SaaS platforms as individual firms’ trading systems decline, to boost cost efficiency and capitalise on value-added services.

“Single-dealer platforms developed in-house will and are currently under significant cost pressure, and moving to software-as-a-service platforms will increase,” says Purdey.

Richard Henderson +44 (0) 20 7397 3820 richard.henderson@information-partners.com