Covid drives shift to next-generation tech

The challenges of Covid-19 have highlighted the constraints of legacy tech and the need for a real-time view of the business and risk in post-trade derivatives infrastructure, says the head of product management for cleared derivatives at ION Markets.

“The current market environment is evidencing more than ever that it’s necessary to have post-trade solutions providing a real-time view of client positions and risk, with increased speed of operations and visibility of exceptions in the trade processing flow,” said Francesco Margini.

Covid has been a key driver of a shift in attitude to technology investment, which is increasingly seen as a real-time differentiator that removes the need for manual processing and brings a competitive edge.

“During the Covid crisis, exchange systems, central counterparty systems and the front office systems of banks and brokers managed to cope well with the massive increased volatility and volumes, while unfortunately some of those using post-trade legacy solutions experienced very severe issues,” Margini said.

This created a domino effect because of the intricate relationships between participants in derivatives markets, leading to a significant business impact on their end-clients.

“Because of the functional limitations and performance constraints of post-trade legacy technology, banks and brokers are still forced to carry out many processes manually, which is resource intensive. Some were unable to meet exchange deadlines, they were unable to have a complete view of client positions and were unable to deliver a service in a timely manner, with rippling effects on other FCMs (futures commission merchants) and clients.”

Margini was commenting after ION’s XTP derivatives clearing solution won post trade system of the year in the FOW International Awards 2020. This was one of three awards captured by the data, analytics and trading tech firm which also took Technology Innovation of the Year for its ION low-touch solution, while ION Risk was named Risk Management Solution of the Year.

ION’s XTP solution has been developed to automate the complete cleared derivatives post-trade lifecycle and deliver actionable insights. Essentially it is a front-to-back office solution providing clearing, settlement, risk management and reporting in one platform in a single, unified system with integrated workflows and a central repository of data.

ION Markets describes XTP as a solution that transforms complexity into simplicity. Its message is that by removing disparate workflows that lead to data duplication, reduced scalability and increased operational risk, firms can also remove significant costs and inefficiencies.

XTP grew from a multi-year investment project that began when ION acquired electronic trading solutions provider Rolf & Nolan Systems in 2008.

“When ION acquired Rolf & Nolan, we acquired a company with a clear intent and vision to bring innovation in the cleared derivatives space and truly allow customers to escape the legacy solutions that they used for so many years,” Margini said.

“We were able to deliver a next-generation solution in transaction processing by combining ION’s technology expertise coming from the front office space with the Rolf & Nolan experience, documenting the needs of our customers active in derivatives clearing.”

In the initial phases, developers looked scientifically at all post-trade business processes to design a holistic solution for both global and smaller clearing firms clearing through third parties, Margini said. Two key objectives were workflow automation to reduce human error and deliver scalability, and the ability to process trades in real time.

It is this continuous processing functionality, which includes top day processing of reconciliations and trade remediations, that enables firms to move away from the costs and risks of a next-day model to a system that provides a real-time view of the client business.

The solution can process trade volumes at an average straight-through-processing (STP) rate of 99.8%, reducing manual tasks for clearing and post-trade events with no impact on performance. This minimises operational risk and ensures clients meet exchange and regulatory deadlines.

“The ability to process trades in real time is a key technical feature that responds to the need for customers to understand what clients are doing,” Margini said. “Their net positions, their risk exposure to the CCPs, commissions, profitability, breaks in the trade flow during the day; these can only be spotted if you truly have a real-time processing system.”

A third goal was to provide clients with the ability to monitor key performance indicators and spot trends on a customer-by-customer basis.

“One of the limitations of legacy technologies is that they are kind of black boxes, it’s very difficult to extract data and derive insights,” Margini said. “Modern technologies like XTP are able to expose this data, perform calculations and provide analytics, which give a huge insight from an operational perspective, but also from a business perspective.”

For ION’s clients, moving to XTP from legacy tech is a long-term project that can take up to two years for large tier-1 banks, although the typical implementation time is less than a year. Currently, ION is seeing interest in the solution increase, both from existing and potential customers.

“Now more than ever there is a need and an appetite, and we believe that this need will effectively create the conditions for allocating a significant portion of the technology budget into the post-trade space,” Margini said.

“In the past couple of years, the agenda and the budget were effectively dominated by the regulations.  Now there’s a realisation that in addition to mandatory technology changes to meet regulatory demands, there is also a mandatory need to invest in operational efficiency and scalability.”

To watch interviews covering ION's various award wins in the recent FOW international awards, click on the relevant link below:

International Awards 2020 - ION - Post Trade System of the Year

International Awards 2020 - ION - Risk Management Solution of the Year

International Awards 2020 - ION - Technology Innovation of the Year