New regulatory requirements for reporting over-the-counter derivatives trades have proved challenging for market participants of all types and sizes. Larger regional or global banks have to navigate the variation in rules across jurisdictions, while also dealing with a raft of other regulatory and market demands. Smaller banks and buy-side institutions often do not have the resources or expertise to build the required systems. Step forward Catena Technologies.
In 2013, the Singapore-based financial technology company was engaged by several banks to help develop bespoke applications to comply with OTC derivatives trade-reporting requirements emerging from Asia-Pacific regulators. It quickly became clear to Catena that the problems these banks faced in being able to integrate with their various trading systems and extract and transform the trade data to satisfy the new rules were common across the region. Its solution was to build an application called Trace that banks could use to automate the gathering of data from trading systems, connect to the relevant repositories, submit the required information and then reconcile the reports back with in-house data records.
"We created a dashboard whereby compliance officers could look at a single screen and monitor the status of reporting across all asset classes for all jurisdictions," says Aaron Hallmark, chief executive officer of Catena. While banks such as China Construction Bank Singapore and RHB Bank Singapore quickly adopted the product, buy-side institutions also soon showed interest.
"OTC derivatives trade reporting was an entirely new area for us and the reporting templates are a minefield. Without dedicating substantial resources, it would have been difficult to build a reporting system for ourselves," says Richard Matthews, head of operational risk and compliance at Sydney-based investment manager PM Capital. The firm looked for a third-party system that would automate the reporting workflow and could cover all its obligations. "The Trace system provided an easy user interface, and could do it all," says Matthews.
Trace is unique in its combination of regional focus and breadth of functionality. A number of trading, risk management and other system vendors do offer trade repository reporting, but not necessarily for all asset classes, or for trades outside of their particular system, or for all local rules. Specialist reporting system vendors have tended to focus on US and European requirements, which can differ significantly from Asian rules. For example, the Commodity Futures Trading Commission demands single-sided deal reporting in near real time, whereas most Asian regulators require bilateral reporting on a T+1 or T+2 basis. In addition, some Asian regulators, such as the Hong Kong Monetary Authority, place greater emphasis on data quality, while the Australian Securities & Investments Commission is setting the pace with a demand for valuation and collateral reporting as well.
Besides addressing the particularities of all local rules, Catena has also evolved the delivery and efficiency of its application. Some clients did not have the infrastructure in place to support the reporting process from the installed application, or were reluctant to build it because of cost, so Catena developed a hosted service version of Trace running in a private cloud. China Construction Bank Singapore and PM Capital are among the clients that have migrated to the new service.
The move to a hosted platform has also opened up new opportunities to extend the functionality. "Once we had Trace operating in a secure data site, it meant we could look at bringing in data from other relevant sources," Hallmark says. For example, some of its buy-side clients use third-party confirmation and valuation services, such as Markit, and Trace will link directly with these to collect the information for the client. "Trace has also linked directly to some custodian banks, which has been very helpful for collateral reporting for our buy-side clients," says Hallmark.
So far, Trace has 18 users in the region, more than half of which are banks. ICBC Singapore said comprehensive functionality and scalability to handle future requirements were important factors in its choice of Trace, while Bank of Queensland cited the system's configurable business rules, automated workflow and easy-to-use dashboard as helpful in streamlining its reporting process. Sydney-based BT Investment Management and Melbourne-based AustralianSuper pension fund are among the growing buy-side user base.
Catena is not standing still with Trace. A number of the users have realised that although their initial motivation was compliance, as more of their data – transaction, valuation, collateral – ends up on the platform it becomes a rich source of information that could be mined for further purposes. Catena has already prototyped analytical capabilities that it plans to demonstrate to users by the end of the year, which will include the ability to produce position reports and calculate notional and counterparty exposures. In addition, Catena sees the opportunity to extend the reconciliation beyond in-house data to reconciliation with other parties, such as custodians or other regulators.
Hallmark expects banks to adopt these new capabilities first, but in the longer term anticipates that the sell- and buy-side user base will even out. "Going forward, we expect to see a fairly even split between our banking and buy-side clients. But new areas of reform, such as the Markets in Financial Instruments Directive II, invariably impact banks first. So while the proportion of our clients using the most mature solutions will likely continue to grow in favour of the buy side, our newest and most innovative solutions will most likely be used predominantly by banks during the earlier phases," he says.