I’m not big on New Year resolutions or on predictions. But in the case of Dodd-Frank and EMIR in Europe it’s hard to resist. The die has been cast and SDRs are a real thing now.
Setting aside for the moment the master strokes about what DF and EMIR are supposed to be about, let’s talk for a moment about the hands on, down in the trenches effect of what these rules are actually causing.
A trade clean up of epic proportion.
It sounds like a great and practical idea. Perhaps an idea that many firms agree have been put off too long. But there is a problem. A big one actually…this is the commodities business.
In the commodities business we have legacy systems. No I don’t mean just in-house built systems. I mean vendor systems that were architected in the 80’s and 90s. Lots of them out there, sold as new, patina upon patina, with the same fundamental architecture they started with. I was working with a vendor system at a client. One of our younger developers was pulling his hair out asking why, why did they do this?! The answer unfortunately is the same as the reasoning for popped collars and hair gel in the 80s. “It was the thing at the time.”
Immediately on everyone’s plate is how to get trades out of these old architectures and get them properly into the SDRs. This turns out to be, at best, like data gymnastics. At worst mad contortion. If the data is a spaghetti-works to begin with the probability of a trade break goes through the roof. Surveying the dozen or so systems we have connected to the SDRs better than 3/4 of those have a significant amount of transactions that have been “shoehorned” into the system. This is a recipe for a trade break downstream with ICE/DTCC/CME or whatever SDR has been chosen. These systems are somewhat unforgiving, and as a result unless they come across perfect they bounce.
Forget the Year of the Snake. This is the year of the Trade Break.