Transforming Technology Infrastructure

Transforming Technology Infrastructure

Technology is essential in supporting the enormous and growing global OTC derivatives market which had a total notional outstanding of $714.7 trillion at the end of June 2023; 13.1% higher than mid-year 2022 and 15.7% higher compared to year-end 2022. ¹

The market has long suffered accusations of opacity and complexity and given the high instances of trading failure - according to data from the Swift network, one in 10 trades fails to settle as planned, while one in 20 trades settles late² – it may also be criticised for inefficiency.

It is no wonder then that in May 2022 the International Swaps and Derivatives Association (ISDA) published a white paper which set out how market participants should adopt “an ambitious strategy for defining a digital future for financial markets, fostering an environment for technological innovation, and building a safer, more robust global financial system”. ³

This roadmap for digital change in OTC derivatives is, ISDA says, intended to “empower current and future leaders to take proactive steps in developing tangible use cases, resolving challenges associated with these use cases and delivering on the promise of innovative and transformational new technology”.

Over the ensuing year, ISDA reiterated the need for market participants to turn to technology to assist with the increasingly challenging market environment.

In 2023 Scott O’Malia, ISDA Chief Executive Officer, said: “In a highly uncertain economic environment, it would be easy to assume that financial institutions should put technological investments to one side and focus on navigating other pressing challenges. In fact, the reverse is true. With mounting pressure on costs, using technology to create efficiencies can have a positive impact on the bottom lines.” ⁴

And while ISDA acknowledges the huge number of possible solutions vying for OTC market participants constrained IT budgets, it encourages firms to prioritise exploring distributed ledger technology (DLT); Application Programming Interfaces (APIs); and the Cloud.

Discovering DLT

DLT is projected to be instrumental in improving efficiency in OTC derivative markets, for example delivering $20 billion annually in global clearing and settlement costs by 2030. ⁵

A survey of 359 financial services companies in 2023 found a 7% increase in the number of firms that are live with DLT and digital asset projects that went live over the year – compared with a 24% jump over 2021 to 2022. ⁶

However, incorporating DLT is not without its challenges, most significantly in the cost of both implementation and then subsequent maintenance. Firms need to ensure they have a long-term strategy to avoid putting in place a patchwork of solutions that may create more challenges than they solve.

Advancing APIs

Another important technological transformation in the OTC derivatives space comes from APIs, which provide a standardised way for traders, institutions, and developers to access market data, execute trades, and manage their portfolios.

APIs take much of the heavy lifting out of the markets by automating processes; providing a wealth of information including real-time prices and historical data which enables traders and institutions to make informed decisions and develop sophisticated trading strategies.

APIs are also essential in supporting risk management, allowing traders to set stop-loss orders, profit targets, and position limits programmatically. This reduces the potential for disastrous losses and promotes disciplined trading.

The API market is yet to achieve its full potential – further use of AI and machine learning will only serve to improve trading strategies while greater regulation ensures transparency, security, and fair market practices. At the same time, a more connected API landscape will make it even easier to integrate the technology into firms’ existing OTC derivative processes.

Capturing the Cloud

Cloud technology is also transforming the OTC derivatives market, offering participants easy access to derivatives transaction data.

Cloud technology provides firms with real-time access to crucial market data, enabling them to better manage risks associated with trading activities better, and further removing the need for manual data collection.

Parameta Solutions, the data and analytics division of TP ICAP Group, which is the world’s largest inter-broker dealer, has been leading the field in technological transformations for the OTC markets since inception.

Our indicative and transactional data comes with full history for all the markets we cover which is delivered seamlessly into clients' workflows via desktop, cloud, data feed, API solutions and from a range of partners.

This flexibility of delivery empowers market participants with analytical tools and data to fuel algorithms and models, so they can identify trading opportunities and assess risk with ease and within budget.

We are driving the technological transformation of OTC markets, listening to participants and finding solutions that keep our clients ahead of the competition.

To find out more…

¹ https://www.isda.org/a/5ihgE/Key-Trends-in-the-Size-and-Composition-of-OTC-Derivatives-Markets-in-the-First-Half-of-2023.pdf ² https://www.swift.com/news-events/news/fewer-settlement-fails-through-more-visibility ³ https://www.isda.org/a/6YVgE/The-Future-of-Derivatives-Markets-A-Roadmap-to-Innovation.pdf ⁴ https://www.isda.org/2023/02/27/continuing-our-digital-journey/ ⁵ https://www.gfma.org/wp-content/uploads/2023/05/impact-of-dlt-on-global-capital-markets-full-report.pdf⁶ https://www.broadridge.com/_assets/pdf/gated/broadridge-dlt-2023.pdf

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