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GDS International - Challenges With Messaging and Data Integration in a Newly Regulated World
 

GDS International - Challenges With Messaging and Data Integration in a Newly Regulated World

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As capital markets regulatory reform continues to sweep across the globe, one key area that’s going to undergo significant change is messaging and communications. How firms will handle messages and ...

As capital markets regulatory reform continues to sweep across the globe, one key area that’s going to undergo significant change is messaging and communications. How firms will handle messages and integrate message types over different platforms and across regions remains at best a challenge and at worst a migraine headache.
In this Q&A, Ganesh Srinivasan, director of financial services solutions at Volante Technologies Inc., discusses the challenges with messaging in a newly regulated world, the limitations of today’s message standards and what firms should do to manage through this rough terrain.

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    GDS International - Challenges With Messaging and Data Integration in a Newly Regulated World GDS International - Challenges With Messaging and Data Integration in a Newly Regulated World Document Transcript

    • 16 August 2012Can You Hear Me Now?As capital markets regulatory reform continues to sweep across the globe, one key area that’sgoing to undergo significant change is messaging and communications. How firms will handlemessages and integrate message types over different platforms and across regions remains at besta challenge and at worst a migraine headache.In this Q&A, Ganesh Srinivasan, director of financial services solutions at Volante TechnologiesInc., discusses the challenges with messaging in a newly regulated world, the limitations oftoday’s message standards and what firms should do to manage through this rough terrain.TabbFORUM: Everyone in financial services knows that regulatory reform is going tomean big changes to how most of them do business. From your perspective, what’s thebiggest hurdle that firms face with regard to messaging and data?Ganesh Srinivasan: Market structures are just evolving and will take time to mature. But as webegin adapting to the new structures, there will be an ongoing stream of new entities tocommunicate with, varying degrees of adoption of common “recommended” message formats,subliminal competition between central counter parties, swap data repositories, swap executionfacilities, etc… working against arriving at a standard. The net result being potential confusion.The regulators have started working from the end-point – SDR reporting – whereas the importantpieces like CCPs and SEFs have yet to evolve. This definitely adds to the uncertainty of how thewhole piece is going to be built and managed. While traders may enjoy uncertainty and risk –indeed that is how they make their money – IT folks dread unclear requirements and frequentchanges.In addition, there are a number of new messaging standards that every new entity will try toimpose, there’s going to be a need to integrate data from multiple silos – from different assetclasses and from back office and middle office systems. And various message types will need tobe integrated with other enterprise systems.
    • TF: Within that, what are the specific challenges? (e.g., country specific, region specific,type of trade)GS: Global compliance requirements are nowmandated by multiple regulatory agencies indifferent regions. Besides the Commodity FuturesTrading Commission and the Securities ExchangeCommission in the United States, European andJapanese regulators are also passing their ownregulations.European Market Infrastructure Regulation(EMIR) and the proposed MiFID II includemandatory clearing, reporting, and risk mitigationfor derivatives and other over-the-counterinstruments. The European Commission haspublished proposals providing for both pre-trade and post-trade transparency. Japan has alreadymandated clearing and is in the process of passing the laws on the use of trading platforms, aswell as post-trade transparency. Canada is also making its own regulation for swaps markets.Undoubtedly after a “wait and see” period other countries will follow.As a result managing messaging and data for operations and compliance in each region is thebiggest challenge.TF: There currently are message standard platforms (FIX, FpML, etc…). What are theirlimitations?GS: The major challenge is that there is no one universal messaging standard and the standardsthemselves are only guidelines. Most of the utilities and regulatory bodies have their ownextensions or versions of standard messages. For example, DTCC uses FpML standards but ithas its own extensions.In addition, different institutions doing the same function use different standards. The SDRfunction today is supported by both DTCC and ICE. DTCC uses FpML but ICE uses FIXml.Each SEF has its own choice of the standards (in addition to the extensions they define to thestandards) – Bloomberg has its own proprietary API and other entities use different versions ofFIX, FpML or FIXml.Since there are multiple versions of the same message standards, there is always a challenge iftwo parties do not use the same version.Even in the de facto standard space, we have what is almost competition between standards –FIX, FpML, SWIFT – while this evolution of which component to use for which purposecontinues we will need the ability to run business processes at a level which insulates from lack
    • of consistency and enables faster building of business processes on the parts that arestandardized.TF: Why should swaps dealers, major swaps participants and/or end users be concernedabout this issue?GS: Besides compliance issues, this poses operational challenges and can increase the cost ofoperations. Firms can lose their competitive edge in a high volume, low cost of tradeenvironment.TF: What’s the answer? How can firms, which already have significant technologyinfrastructures in place, address these challenges, especially during a time when technologybudgets are under so much pressure?GS: Leveraging existing investments in technology as much as possible is one answer.Productivity tools that can leverage existing infrastructure and improve operational efficiencyand thus business agility, i.e., lower cost of maintenance, customer and venue onboarding andfunctional enhancements, will be of great help.TF: Is there a build vs. buy component here?GS: Well it’s not build vs. buy so much as build and buy.There’s no need to reinvent massive industry-wide investments in standards. This is not whereyou get competitive advantage. It’s a pure cost.A one-size-fits all solution is not available yet and even if that were feasible, it would beexpensive and involve lengthy implementation and change cycles.A combination of buying the right tools and building your own solution is advisable.TF: What’s so difficult about Dodd-Frank reporting requirements that makes it importantfor me to invest in this type of technology?GS: Well it’s creating a new market structure – electronic trading, regulatory reporting andcentral counter party clearing. It’s changing regulations – not all regulations are final and everychange or new regulation will require an amount of rework. And the messaging and connectivityrequirements for these two issues cannot be underestimated.
    • TF: Banks historically have siloed operations and as such siloed data. New regulations cutacross asset classes even as the buy side seeks more and more cross asset and crossgeographic opportunities. Do these two factors add to the complexity and difficulty of themessaging/data problem? If so, how can it be overcome?GS: This gets very complicated when you have multiple SEFs, trade repositories, clearingcorporations and regulatory authorities across geographies. A common sense approach is to builda data integration hub that can handle messages and data across silos/geographies. That said,building such a hub that is flexible enough to handle the multiple entities, asset classes andgeographies is quite a complex exercise. Attempting to build one without a right tool will be anIT nightmare.Silos are an unfortunate given of the heritage we now have in financial servicestechnology/systems landscape. We have to develop work arounds as we simply will not replacethese silos any time soon. By extracting the message/data issue from the core function, we bringit out into an environment where it can be treated as the function it is in its own right. If we thendashboard these messages – we get a holistic view of information across the firm – which, infact, is the basis of what regulators are looking for – hence we are – rightly – passionate aboutmessaging.One of the biggest challenges is to have very senior management recognize the need for a hub orcentralized data transformation facility to meet the new regulatory requirements and require themultiple business silos, IT and operations to sign up for this approach, pay for it and cooperate inits creation and execution as quickly as possible.TF: Some of the regulations the industry expects are not yet in place. Is it too early toimplement a new messaging/data function before final rules are in place? What’s the riskof waiting?GS: The one certainty looking ahead is change and evolution. The financial services trade cycleis being redesigned with new messages for inter-party communication. There is no end point insight, so what is needed is to extract the data/message function so it can respond whatever isdefined and implemented – call this agility or flexibility.The cost and reputational risk of non-compliance is very high. Waiting till the last minuteincreases that risk. Firms should look for tools that can offer flexibility to manage changes andrapid development to speed the solution(s) to meet the market and regulatory challenges.
    • TF: What about adaptability? If things change in a year or two…GS: Our suggestion is to de couple messaging from core asset calls and functional systems. Treatit as a new and separate discipline with technology-enabled processes that can handle anythingthat’s thrown at it – and leverage economies of scale from syntax standardization to date.A flexible and loosely coupled architecture that separates the message integration fromapplications and hardware is the key. Investing in tools that can help to build incrementalscalability is the need of the hour.TF: What will happen if I decide not to invest in this type of solution?GS: To begin with, extra cost in the long term – difficulty in adapting and disrupting coresystems to add new formats as they are defined and adopted. Not to mention exposure tooperational risk from the same. Then there’s the risk of heavy penalties for delayed compliance,high cost of doing things on the fly, band-aid solutions that may lead to heavy manualintervention and high cost consultant resources, death march projects with high staff burnoutsetc…and the list goes on.TF: What’s the biggest challenge you face when you’re out talking with people about thisproblem and your solution?GS: Typical objections go like this. “We don’t have senior management buy-in for a centralizeddata transformation hub.” “We need a ready-to-use product or solution on day one instead of aframework.” “We can build things internally.” “We have started our project and hiredconsultants hence have limited budget for buying a tool. “We haven’t created a messagingelement in our systems strategy.”TF: Thanks Ganesh.