FIA Paris – resilience in the markets

It was great to be at the offices of Euronext in Paris last week, attending the FIA Paris conference. The top theme cutting across the discussions was all about how we can preserve safe, orderly markets in volatile times, particularly in relation to assets such as commodities that have a strong link to the real economy. There was some good debate about the effectiveness of circuit breakers and when and how they should be deployed. Trading venues need to be able to have protection against spikes in trading while keeping the market open for as long as possible, allowing them to provide a genuine reflection of underlying conditions. Strong market infrastructure and in particular resilient clearing houses are critical.

There was debate about OTC trading and the effectiveness of enforcing full reporting of OTC trades. At first glance, OTC trading usually involves higher commission, doesn’t guarantee best execution and of course there is counterparty risk. Nevertheless, it’s flexibility means it is well suited to many trades. It is therefore the challenge for trading venues to bring more of this trading onto their order books, and new types of trading platform play an important role in achieving this.

Clearing houses also need to be able to reliably accept a wider range of collateral. Although they continue to adjust their margin methodologies (Sinara have been working on VaR calculation engines), margin levels are higher all around, putting pressure on clearing members to optimise their collateral to meet the demand. With OTC derivatives increasingly going to central clearing, further collateral is needed; this is where collateral transformation services can allow members to meet these liquidity demands. Leveraging digital services to provide this service is an opportunity in itself.

The long-standing issue of post-trade automation came up again. There are huge opportunities to continue reducing matching, clearing, and settlement times, with further automation to clearing processes, whether within the clearing broker or the clearer itself. Something as superficially simple as getting a trade into the right account can often be a lengthy process, meaning that client positions are not immediately obvious. The historical separation between pre and post-trade needs to continue to close, and this is something that Sinara have been working on as part of our SinaraTLC solution and associated client projects. Risk management processes can also benefit from more automation, especially intraday margin monitoring.

As ever, it was good to talk to colleagues across the markets about these challenges. Sinara looks forward to continuing to support our clients in their ambitions to take their own trading operations to the next level and deliver innovative new services for the financial marketplace.