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Elizabeth Riegel

TabbFORUM Contributing Editor

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Elizabeth Riegel

Real-Time Clearing

09 August 2011

Clearing Getting Pushed to Speed Up

Riegel says increased regulation and the prevalence of high-frequency trading have combined to push clearing and technology firms to speed up the clearing function.

File this under unintended consequences:  Increasing regulation of clearing in the U.S. and Europe and the growing prevalence of high-frequency trading have combined to push the clearing function from its typically leisurely pace.

As most capital markets players know, under Dodd-Frank, much of the over-the-counter derivatives market in the U.S. will trade through clearinghouses. In Europe, EMIR provides similar rules and the upcoming revisions to MiFID are expected to address this issue as well. This increased systemic reliance on clearinghouses means increased scrutiny and regulation.

As a result, members of clearinghouses will be required to have more rigorous risk management procedures in place by the end of this year. Some yet-to-be-named clearinghouses, dubbed “systemically important” by the Financial Stability Oversight Council, will be subject to even greater oversight.

All this new regulation has lit a fire under clearing houses and they have scrambled to find risk management solutions that will work for them and their clients while fulfilling their obligation to lawmakers. And, increasingly, a big part of these solutions has been real-time clearing.

Real-time clearing, more accurately, is real-time risk management with settlement as soon after a trade as is reasonable. In real-time risk management, the risk for every trade is automatically calculated immediately before and after the trade occurs.

In one sense, real-time clearing seems to be a way for the world of clearing to get in sync with the world of high-frequency trading.

“Developments in technology have accelerated the speed and complexity of trading,” said Heiner Seidel, a representative of Eurex, “and clearinghouses have had to adopt those same advancements to ensure that their risk management keeps pace for the benefit of a safe market.”

That’s not to say real-time clearing isn’t useful across a variety of trading types, but HFT in particular can benefit from it. In volatile markets, mistakes in HFT can occasionally lead to flash crashes, sinking markets dramatically in a matter of seconds. By managing risk in real time, both immediately before and after these instantaneous trades, traders may be able to avoid these mistakes.

Eurex Clearing is one of the main clearinghouses to have embraced real-time risk management. Since March 2010, Eurex Clearing has been offering its “Enhanced Risk Solution,” a real-time risk data distribution service. The service has been made available across all asset classes and products and incorporates both pre- and post-trade risk controls.

ICE has been similarly busy. In addition to launching two new central clearing services for the U.S. and Europe, the company has also enhanced its internal intra-day risk controls. “We now undertake full revaluation and margining every minute throughout the business day,” said an ICE spokesperson, who also stated that real-time risk management was likely to expand in the future.

Perhaps not surprising, everyone wants some form of immediate risk assessment tool. A recent survey of global investment banks conducted by Lepus found that nearly all the banks were making some sort of move toward real-time risk management. The ability to immediately assess their risk position, they say, will allow them to undertake more trades with greater confidence.

For banks and clearing firms without the internal capacity to develop their own real-time risk management solutions, there are technology firms.

One of those, Cinnober, launched its TRADExpress RealTime Clearing system in 2010. The system attempts to match the speed of high-frequency trading.

Technology can’t entirely replace human oversight to clearing – after all, clearing has traditionally been a lengthy process for good reason. The process of clearing up to the point of settlement is well on the way to full automation, but settlement must still be done by humans.

High speed trading technology is fallible, as can be seen from flash crashes, and without human oversight, bad trades might be settled before anyone has a chance to catch them.

However, given the newly energized movement behind real-time risk management, it seems probable that the final step of settlement will continue to accelerate. The era of multi-day clearing is likely coming to an end.

Spotlight-white-trans For more stories in the Real-Time Clearing Spotlight Series click here.

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1 Comment to "Clearing Getting Pushed to Speed Up":
  • Comment_zohar

    10 August 2011

    Elizabeth, I want to agree that systems like Eurex might strive for real time pre and post trade risk but some factors, such as availability of settlement curves from the CCPs, would come in late (7PM) for example..  This would mean the publication of the prices and trade details are not uniform across the financial system.  For instance, one system might be able to accept real time data and process it but another system might not be able to send the data to the new system to begin with.

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