SunGard has announced the introduction of a new utility to help global market participants meet regulatory pressures related to cleared OTC derivatives and post-trade futures. The utility will leverage technology to gain efficiencies, reduce risks and lower costs for global capital markets firms’ middle and back-office functions.
SunGard’s utility will provide customers with technology services and derivatives clearing operations for trade clearing, lifecycle management, margin processing, brokerage, reconciliation, data management and reporting to meet regulatory compliance needs. SunGard’s global back-office processing system for listed and cleared OTC derivatives that covers 160-plus cleared derivatives markets worldwide will supply the underlying technology to power this utility.
“Post-trade cleared derivatives processing is highly commoditized, providing little differentiated value to each firm at increasingly higher costs due to today’s regulatory environment. SunGard’s post-trade derivatives utility will help transform the cleared derivatives middle and back office across the entire industry, resulting in a more sustainable operating model and cost structure for the future,” Brian Traquair, the head of SunGard’s capital markets business, explained on the sidelines of the 40th Annual FIA International Futures Conference. “For 85% of the market, they are already on our software. So this isn’t a big technology migration, which you would have if you were moving to some other platform. That’s part of what makes this particularly good. The vast majority of firms here are our clients. They trust already. This is like a next step for them, rather than something that is completely different.”
Industry leader Barclays has signed on as the inaugural customer for SunGard’s new utility, with members of Barclays’ team transferring to SunGard as certain OTC derivatives and futures clearing operations migrate to the new utility. Traquair said SunGard has been working with Barclays since last summer. “We tested everything by asking: Is this good for Barclays and is this good for the next 100 clients? Because if we didn’t get two yeses, then we wouldn’t have a utility. For us that was fundamental and Barclays understood.”
SunGard’s utility comes as the Dodd–Frank Act in the U.S., European Market Infrastructure Regulation and Basel III regulatory structures that have cut into profit margins while increasing compliance costs for firms worldwide. “The utility takes our value proposition up a notch, but I think it can also help the industry,” Traquair explained. “For an industry that has had its margins substantially compressed and we can improve that margin by 20%, that’s a big deal.”
A recent Tabb Group study found a 49% reduction on the number of CFTC-registered FCMs in recent years. Traquair detailed one way the utility could help stem that tide. “Say you are running a regional FCM and you are thinking of expanding into Asia. Right now, that is a huge decision. But if we are running a utility where 75% of your stuff is already taken care of, then your marginal costs are going to be way lower. … We think the utility might help firms expand across different regions and take on less risk to do it.”
“With well over half of post-trade derivatives processing replicated in each clearing firm, consolidating a majority of these non-differentiating operations into a single shared industry utility will positively change the economics of the industry by increasing efficiency, simplifying regulatory compliance and altering the cost structure for industry participants,” Larry Tabb, founder and CEO of Tabb Group. “Reframing the existing business model will enable FCMs to focus efforts and investments on clients and risk-facing activities. The introduction of a derivatives utility is expected to be transformative because it will essentially re-define the cleared derivatives operating model for the industry and drive sustainable efficiency improvements through standardization and best practice implementation, automation and scale, as well as ongoing TCO savings for utility customers.”
Traquair is upbeat about what the SunGard utility could mean for the FCM landscape. “I am hopeful that a year or two from now, the stories around the FCMs’ profitability and sustainability will be much better, which is good for the regulators, good for the exchanges and good for the clients.”