New OTC Derivatives Rules to Send Data Levels Soaring 400 Percent

Regulatory changes to the over-the-counter derivatives markets in Europe and the U.S. will cause data levels to soar as much as 400 percent above the current level, according to a study conducted by Tabb Group.

The adoption of new mandatory electronic trading, clearing, and reporting standards will drive the amount of data generated by the OTC swaps market to unprecedented heights, the research said. And while the new data levels will pale in comparison to that of other exchange-traded assets such as equities and futures, the workflow for OTC swaps traders is certain to become exponentially more complicated, says Kevin McPartland, the head of Tabb Group's fixed income unit.

"The data we expect to see is not overwhelming but compared to what the OTC derivatives areas are used to in the past, it's a huge change from before," McPartland explains. "Things that were done in a batch overnight now need to be done intraday. So not only are they doing it faster, but they need to consume a considerable amount more data to make those same decisions and calculations."

Meanwhile the line between success and failure in this sector will be determined by the strength and intelligence of a firm's technological infrastructure like never before, the report said. But compounding matters is the continued uncertainty over how the Dodd-Frank finance reform bill will be implemented. As of July 1, only 38 of an expected 400 new rules that explain how the law will function had been written.

Because of this, McPartland says any upgrades that firms implement will have to be scalable. "It's just too hard to know from the regulatory uncertainties how fast and how automated this market could really be," he says, noting that it could take as little as two years for clarity on that or as long as a decade.

Nevertheless, it appears that firms have begun spending on new platforms, the report points out. According to Tabb Group, OTC derivatives market participants will spend $3.4 billion on clearing and back-office technology this year. The new margin requirements are a driving force behind this spending, McPartland says.

"That's a place where people are spending a tremendous amount of money, to do those margin calculations," McPartland explains. "That's part of this back office risk management spend."

Speed is also about to become a bigger factor in the OTC swaps space, the report contends. Through its research Tabb found that firms will look to ensure lower latency in the new landscape, although swaps trades still won't approach the lightening fast speeds of equities transactions.

"Latency is all relative. So we're not going to be talking about microseconds in swaps trading," McPartland says. "However you're going from overnight batch to intraday, or an hour to a minute. That's a huge drop in latency."

But even as the level of data explodes, the networks that are currently in place have the bandwidth to handle the wave of new message traffic, the research finds. McPartland says Tabb reached that conclusion after analyzing how firms upgraded to 10 gigabyte Ethernet connections while increasing data center capacity over the last two years.

Yet going from 2,000 trade sides a to an estimated 40,000 will require a fundamental rethinking of data management in this space, the report says.

"Bringing the data mart concept to the front office is essential," McPartland says. "The challenge will be in creating a best-of-breed solution based on a combination of in-house and third-party technology to solve the vast array of data challenges."

As the Senior Editor of Advanced Trading, Justin Grant plays a key role in steering the magazine's coverage of the latest issues affecting the buy-side trading community. Since joining Advanced Trading in 2010, Grant's news analysis has touched on everything from the latest ... View Full Bio