Following the 2008 financial crisis, G20 nations implemented regulatory reforms for the over-the-counter (OTC) derivatives market. The Financial Stability Board (FSB) spearheaded efforts to enhance market transparency, prevent abuse, and reduce systemic risk. This led to the emergence of middleware platforms playing a crucial role in OTC derivatives trading.
REVISED FUNCTIONALITY OF MIDDLEWARE APPLICATIONS
Initially, the G20 envisioned a centralized database for all OTC transactions to mitigate systemic risk. However, data now flows into multiple competing entities, necessitating efficient processes like near-real-time reporting and quicker trade submissions for clearing. New players such as SEFs, CCPs, and independent repositories emerged, reshaping the OTC derivatives trade lifecycle. Middleware applications became pivotal in providing real-time compliance solutions, connecting various market players.
MIDDLEWARES ADDRESS TWO MAJOR INDUSTRIES’ DEMANDS
Middleware services like MarkitServ evolved post-regulation to offer unparalleled connectivity across the industry. They facilitate communication between trading counterparties, execution venues, clearinghouses, and trade repositories. Despite changes in trade affirmation processes, middleware remains crucial, providing status messaging and facilitating compliance.
MANDATORY CLEARING AND COLLATERAL MANAGEMENT
Collateral management has become integral to mitigate counterparty risk, involving the exchange of collateral to maintain margin requirements. Messaging platforms like MarginSphere manage collateral calls, ensuring real-time clearing acceptance. Pre-trade credit checks are mandated to ensure clearing certainty, with solutions like MarkitServ’s Credit Centre facilitating this process.
STRAIGHT THROUGH PROCESSING (STP)
STP, an automated transaction processing method, ensures minimal manual intervention, reducing processing costs and enhancing trade execution speed and accuracy. MarkitSERV’s TradeSTP transforms XML into standard FpML format, supporting post-trade STP for market participants.
In response to evolving regulatory requirements, the focus is on achieving connectivity, pre-trade credit checks, and STP to meet real-time clearing and reporting needs. Middleware platforms like MarkitServ play a vital role in facilitating these functions.
