Eurex | Eurex Clearing
Eurex caught up with Per Haga, Global Head of PDS Product, Barclays about some of the most pressing operational and technology challenges of the future – and how to respond with innovative technologies.
Looking back on March 2020, how did cleared derivatives industry fare overall?
March 2020 posed a number of challenges for the cleared derivatives industry. OTC clearing, a relatively new clearing product for which a new workflow was designed, coped very well, trade breaks were limited and the model handled the increased volume.
Futures and options clearing, which at its core hasn’t changed much over the last few decades, didn’t cope as well as we would have liked with the tremendous volume increases and the additional challenges of the global pandemic. The industry worked through these issues, but there was too a lot of noise and room for improvement.
It was also challenging having to deal with the change to people’s working environment at the same time. Volumes went through the roof just as everyone was moving to working from home and working in a way they weren’t used to with additional challenges to deal with
How far has the futures industry come since those problems?
The recent conflict in Ukraine resulted in another large increase in volatility and volumes, but we saw the industry coping much better. Looking at Eurex as an example we had different experiences with extension of clearing times comparing 2020 with 2022. In March 2020, Eurex typically extended their clearing window on member request for all market participants by two hours and trades still might not have been processed on time. From what I can recall this year, the longest extension was 30 minutes.
The key metric that improved was the timeliness of clearing brokers accepting trades when alleged out from executing brokers. There was not a repeat of the type of delays seen back in 2020 around clearing broker trade acceptance. This shows that the remedial actions taken by the clearing broker community is working.
The FIA has initiated various industry programmes such as the Derivatives Market Institute for Standard (DMIST) with exchanges, clearing houses, the sell-side and buy side. Exchanges have also worked to improve the way they are processing trades. Since early 2020 Eurex has worked particularly closely with its clearing members to ensure optimal setup. The result of that work was on clear display in March 2022, but there is more to do to get to the levels of clearing STP (right trade, right account, right time) that is desirable.
Another difference is that we haven’t seen another change in working environment at the same time as volatility increased. People are very used to working remotely or they’re back in the office; we didn’t have that extra dimension to deal with.
Right now, the next stage is solving workflow problems so we can run even more smoothly during the next volume spike. The one lesson we learnt from March 2022 is that we need to continue to improve the post-trade allocation workflow.
What is being done on that front?
We have seen that a large number of our clients have streamlined some of their internal processes, but the futures industry has made limited progress collectively. I view technology vendors playing a critical role as we look to solve the standardisation of the industry. There are tremendous economies of scale and the buy-side typically will want a consistent operating model across their multiple executing and clearing brokers. A vendor-based solution that can be implemented across brokers, both executing and clearing, is likely to be the most credible option.
How far away is greater standardisation in the industry?
This is where DMIST comes in; there is no defined standard for allocation instructions and clients can largely choose the way they want to communicate these. FIA is driving a common standard; the buy-side, the vendor community, the CCPs and the sell-side coming together to define the solution is essential for its success
Greater standardisation is not an easy one to solve. The allocation workflow is a great proof of concept for it though. If we can agree a standard around that, then it provides a solid foundation for other parts of the industry. There is definitely more work to be done but the progress so far is encouraging.
What else can be done to improve workflow and what have you learnt from your own processes?
There should be a lot of focus on best practices and processes. Feedback from our clients was largely positive on how Barclays responded to the volume increases in March 2020. We held touch points multiple times a day with operations, IT and front office. Getting on the same page, getting on calls, talking through issues and having a lot of people from the front office involved from a very early stage helped with escalations and solving problems. We didn’t wait for a problem to become big before escalating, we got there early; right from the start we had clear dialogue from front to back of the business for how we covered clients.
When the invasion of Ukraine began, we adopted the same approach straight away, making sure that we took onboard all the lessons learnt in 2020. However, this is still a firefighting approach. The proposed standards and technology solutions are aiming for fire prevention and we are very supportive of that approach.
How much can technology help solve these problems?
Technology is key to help create a scalable and efficient futures clearing environment. If we can get the right trade in the right account on trade date, that will then heal so many other problems in the futures space. The moment the right trade doesn’t end up in the right account then it triggers a cascade of other challenges. Moving on from there, it is about driving more automation to create a more robust and scalable processing environment that ultimately cleaner for the end client. We can look to hook into the standard FIA Tech industry tools around commission rates and exchange fees and look at ways to leverage those information sets and create feeds so they are picked up automatically. The more we can do in terms of putting feeds together and ensuring they capture the data, the more robust a process the industry can build, with fewer breaks. Again, this is where I see technology vendors playing a critical role.
To hear more about this topic, please join Per Haga in an upcoming panel on clearing innovation as part of the Derivatives Forum Frankfurt.
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