Q&A with Jon Anderson, Global Head of Valuations and OTC Derivatives, SS&C
Global Head of Valuations and OTC Derivatives,
QIn your role at SS&C, what have been your priorities over the past six months/year with regard to OTC derivatives? How has this changed from prior times?
Without a doubt the preparation for mandated clearing has trumped all. This has meant much of the focus has been on IRS and CDS, with FX just coming into the picture. This has affected every life-cycle process we managed for our clients – trade capture, trade affirmation, reconciliations, valuations, and collateral management. We have been actively developing solutions to tie into new market mechanisms and services, many of which were and are being developed and revised in parallel with our own.
That said, this is not the only focus. Staying up with the still developing regulations, preparing for reporting requirements and expanding our collateral to accommodate multi-currency CSAs (ISDA credit support annex’s) have also kept us busy.
QThere continue to be concerns over valuation and risk assessment with regard to OTC derivatives. What can and should firms be doing to guard against risk? What options are available to them?
With regard to valuation, I believe that we have been at the forefront of that issue for some time now. The financial community that saw the veneer ripped off of derivatives valuations in the fall of 2008 has evolved new best practices. We have been right in the middle of that. The core theme is that in the real world of imperfect prices, understanding the valuation process is essential in assessing risk.
It is incumbent upon interested parties, be they COO’s of corporations, asset managers or those responsible for oversight on behalf of investors, to look under the hood of the valuation process. We focus on provide accurate pricing and tolerance checks using a wide array of data sources. But equally important, we assure a consistent applied process, consistent and proscribed manners of resolving exceptions, and, for oversight and review, transparency into the process and management reporting that allows an accurate assessment of confidence levels.
I think market risk assessment is improving for three reasons: better control of data, better understanding on the part of asset managers/investors and better governance.
The same due diligence I outlined for valuations also pertains for risk. But the job is an even bigger one. People understand more and more what tools are available for managing risk and appreciate that assessing risk requires multiple approaches. VaR, so called Greeks (delta, gamma, vega…), historical scenario analysis, prospective scenarios, correlated event analysis, industry concentration analysis, etc. – all may be pieces of the puzzle and need to be understood in the context of the assets being managed, not ticked off like a to-do list.
Tools for gathering and centralizing trade data, market data and for computing and reporting risk are improving – whether asset managers build their own, buy provider systems or outsource their risk management.
QThe OTC derivatives market has grown at a very fast rate over the past few years. How has this impacted your job? What do you see as the “next step” for you?
I read an estimate that the notional value of all derivatives contracts is now estimated at 1.4 quadrillion dollars. After a brief contraction in 2008-9, were back on a vibrant growth path. That shouldn’t surprise or disturb anyone, however. After all, the first 30 year swaps ever done, only started maturing in the last few years. Moreover, I also saw an estimate that so-called offsetting trades accounted for as much as 90% of the outstanding trades.
Contract standardization, centralized clearing and bilateral compression processes will contract that in the coming years and we have to be ready to service all of these. This means building the infrastructure that supports these trades including links into industry players – clearers, SEFs, DCMs and middleware platforms. We have to be ready to provide the infrastructure and the servicing that allows our customers to tap into these markets without them having to incur exorbitant technology costs or build out oversized operations groups.
QMuch of OTC derivatives processing is automated. What challenges are presented by this and what are you doing to help clients efficiently and accurately process these securities?
Automation of the bilateral world has been improving for years. However, true to the nature of the bilateral world – I’ll steal from Tolstoy here – “each automated solution is automated in its own way.” This is readily apparent as the new technology is being built out to accommodate clearing. Processing norms and information transfer standards are not commonly developed. For example, we have surveyed the dealers who are offering clearing services. Some are building clearing services off of the bilateral infrastructure they have already built. Others are extending their futures systems to offer the service. And a third, ambitious group are building new systems from scratch. This has significant repercussions when we get data from each of these providers. The only good news is that we only need to build our data maps once for each provider to benefit all of our customers
QWhat do you think will be the major challenges facing firms going forward/over the next year or two with regard to OTC derivatives? And how can firms optimise performance once they’ve complied with the new regulations?
The major challenge in my mind will be managing this interim period when we and our customers are straddling two worlds (bilateral and cleared), accommodating shifting regulatory requirements (coming from multiple regulators and multiple jurisdictions), and facing other challenges such as the shifting capital and collateral regimes, all while trying to optimize the use of derivatives on behalf of our customer’s businesses.
But I am optimistic that the technology will get built, the regulations will be rationalized, and market mechanisms for optimizing use of derivatives in a capital and cost efficient way will develop. After all, derivatives are an economically efficient and proven means of risk transfer.
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