In this episode of Droit Talks About, Hopeton Lindo, Client Acquisition, sits down with Alex Richelson, Platform Solutions Specialist, to unpack one of the fastest-growing and complex areas in post-trade compliance: exchange-traded derivatives (ETD) reporting. With global trading volumes reaching record highs, regulatory scrutiny is intensifying, and so are the challenges for firms managing reporting workflows.
Recorded on the heels of the FIA Boca conference, this conversation dives into why Droit entered the ETD space, how our Adept Platform provides transparent QA for venue reporting, and why a non-disruptive overlay, rather than a full system replacement, might be the smarter move for firms looking to adapt quickly to regulatory change. From clearing mechanics to collateral compression and the rising demands of regulators, this episode delivers practical insights for market participants navigating an evolving landscape.
Tune in to learn what’s changing, what’s at stake, and how smarter QA can make all the difference.
Full transcript below:
HOPETON: Hello and a warm welcome from me, your host Hopeton Lindo here at Droit Talks About podcast. I’m part of the business development team here at Droit and I’m joined by Alex Richelson, part of the platform solutions team. Alex, thanks for doing this.
ALEX: Yeah, thank you, Hopeton for having me.
HOPETON: So today we’re taking a closer look at exchange traded derivatives with a particular focus on the regulatory reporting aspect. Consider this. In 2023, global trading volume for exchange traded derivatives hit a staggering 137 billion contracts.
That represents a 64% increase from the previous year and the sixth consecutive year of record setting activity. So what does that mean? As trading volumes rise, so too does the regulatory focus, meaning firms must now grapple with how to meet expanding reporting obligations.
So, against that backdrop, we attended the FIA’s 50th annual International Futures Industry Conference in Boca Raton. Now, for those listeners who know Droit, you might be wondering what on earth were we doing there? Well, we came to Boca to introduce our new exchange traded derivatives reporting QA product. Before we dive into what we did, I’m going to turn it over to you, Alex. So, help us level set. For our listeners who know us through our work in the capital markets, can you give us a quick overview of what we mean when we say exchange traded derivatives reporting?
ALEX: Yes. So we’re here to talk about venue reporting. Venue reporting for exchange traded derivatives. We’re talking futures, we’re talking options, we’re talking options on futures, and specifically talking about end of day reports outlining the positions to the venues, the exchanges, the clearing houses, to make sure everyone has the same view of who owns what and when.
HOPETON: Okay, so in that description you mentioned a few stakeholders. I think it would be, you know, useful for you to just articulate who those stakeholders are just so that we can figure out how they interact and how it impacts reporting.
ALEX: Yeah, so effectively all these exchange traded derivatives have to clear. So the FCMs, the banks, they’re the exchange members, they’re the clearing house members, they are the ones that can actually trade. You have asset managers who have to then trade through these FCMs. These asset managers might be managing monies on behalf of other large clients, people like pension funds, etc.
And so ultimately what we’re trying to do is understand who owns what, the ultimate beneficial owner to ensure that we can appropriately identify what their position is, manage risk, and most importantly manage the actual collateral and margin held at the clearing house.
So understanding and accurately reporting who owns these positions and hold these positions will allow for accurate margining and ultimately compression of that margin to ensure that no one is over collateralized or under collateralized in worst case scenario.
HOPETON: Got it. Okay, so just in that description, I can see that things get pretty complex very quickly. A long chain of events there. So when we think about the evolution of our own products… We obviously started off in pre-trade controls in a capital market space and then we moved into post-trade compliance with trade and transaction reporting and, shareholding disclosures.
Two questions I have on the back of that. How did we pivot into this exchange traded derivative space? And given that we’re not trying to replace some of the full stack legacy systems that firms use, where does Droit fit into the compliance reporting infrastructure here?
ALEX: Yeah, so first, one of our clients who currently use our trade and transaction reporting product suite saw the value that Droit was providing as a QA to their own trade and transaction reporting and thought, why not, why not use the same type of workflow, the same platform to provide a QA on my ETD venue position reporting?
And so they wanted to expand the use of our platform, our Adept platform, to actually then apply that same traceability and transparency to this ETD reporting.
HOPETON: Got it. Okay, so you mentioned the Adept platform. I think it would be remiss of us not to explain to those that are unfamiliar with what that is. For those unfamiliar, the ADEPT platform is Droit’s regulatory operating system. There are three components. First of all, there is a decision engine which determines whether a trade triggers a regulatory obligation. That decision is made transparent through what we call our logic viewer, which visually maps the key decision checkpoints that are evaluated in that process.
Each of those checkpoints are fully annotated and linked to our rules library. That’s the third component. So the rules library is really. Or the digital rules library is a structured repository of global regulations. Or it could be governance rules or internal policies that underpin every decision. So we have the decision, we’ve got the logic and we’ve got the rules. Fully transparent, no gaps.
ALEX: Yes, exactly. So in this case, we’ve already been doing this for a long time. Seven years now, eight years. In the trade transaction reporting space, we have the regulation CFTC part 45 swap data reporting.
We annotate that text to then create the logic. That logic is then made accessible in and through our actual decision engine. So whenever somebody evaluates a transaction or now positions, we have a full traceable and transparent view of, “Here’s what the decision was.” This position is in scope for CME open interest reporting.
And you need to aggregate it this way. To the “how that decision was made,” here’s a visualization of that logic. You can actually see and trace with your finger if you need to, the blue line that shows how we went through the logic. And then lastly, every decision checkpoint within that overall evaluation is then pinned to the underlying reg, text, the venue specifications, whatever source that is implying.
This logic will then be fully transparent and traced back. So you kind of have that full transparency from the what to the how to the why. Got it. Okay. So you’re getting a response knowing what to do, you’re getting the audit artifact that you can then pass through the system and then there is a link back to the rules. Right?
ALEX: Exactly.
HOPETON: Okay, got it. So my question is, if firms already have these full stack systems in place, why would they need this QA system that you’re talking about, like Droit’s, to plug into their current infrastructure?
ALEX: Yeah, so you know, quality assurance systems and reporting workflows are very common and used in a lot of different cases.
We talked about expanding volumes and with expanding volumes means that there’s just a higher volume of positions and records to report what may have been appropriate a few years back, manual checks, sample checking, putting eyeballs on these reports to make sure they’re correct is just no longer appropriate at scale.
So being able to use our Adept platform to holistically evaluate every position, identify which ones are in scope for what reporting obligation, understanding what the aggregation instruction should be, and ultimately providing a set of positions that you can then compare with what came out of your primary system is very valuable.
HOPETON: Why a QA system though? Why aren’t, why isn’t Droit just building a replacement?
ALEX: Well, a replacement would be pretty tough. These existing platforms are either in house built or they’re vendor systems. And they do much more than just output this reporting. They are the position record keeping systems.
They are taking in trades, they are housing reference data, they are building positions day over day, they’re managing the collateral and margining between different accounts, and ultimately posting that to the different clearinghouses. They do a lot. They are monoliths, they’re behemoths, they do a bit of everything.
And what we really want to do is focus on applying our patented technology to the problem best suited for our solutions. So that is kind of why a QA system makes the most sense here. Now, these systems have also been in place for some 20 plus years and the banks have grown with these systems and they’ve provided a lot of different services around these systems.
So even if Droit would like to get into that space, being able to build up that functionality in a short amount of time would take just a very, very long time, an immense amount of resource. So applying our solution to the best problem and that turned out to be the venue reporting.
HOPETON: Got it. Understood. Just as you are explaining that I’m sure that there are other QA systems out there in the market. Can you. Oh no, you’re shaking your head.
ALEX: You know what? No, it seems a lot of the banks are using manual processes. Potentially they’re doing some kind of reconciliation processes, but having a secondary processing of all positions is… is maybe a bit novel.
HOPETON: Okay, understood. Okay, so given what you’ve said has much changed in what the regulators are requiring, I’m assuming that you know that a lot more is being demanded of these stakeholders, especially with the increasing volumes. Can you point to specific areas that has changed recently?
ALEX: Yeah, so you know, there have been a few changes. One is these venues, these regulators are just getting smarter with how they use the data they have. They’re asking for, and they receive not just one report every day, they receive multiple reports.
And these different reports, customer gross margin, open interest, large trader reporting, work together to form a picture of who owns what, how did this position become built up or taken down. And they can use that data to kind of ensure that the data is being coherently represented across these different reports.
The other is there is a large amount of change happening. The large trader report is changing quite drastically. It’s not, it’s no longer going to be just a 50 or 60 character text string per record and you’d have to be an expert in the report to understand what’s even saying. It’s changing into a more modern XML format that can be easily deciphered.
But also the regulators are asking for more information. They’re seeing and understanding now what they can do with the data they already have. And so they want more data. They want not just the position level information, but also some of the transaction level information that may have built up said position. So really there is a bit of an invasive change happening now. And one thing about our platform is that we do manage change very well. We’re able to spin out new logic ahead of change as long as there’s enough time and leeway. That change gives our clients the ability to really understand and evaluate the rules.
Understand and evaluate how that change might affect their business processes and ultimately get into a place where, come go live for the change, it’s a flip of the switch as opposed to a panic over a weekend where you have 20 or 30 or 40 people on call.
HOPETON: Got it. Okay. So what I’m hearing from you is that there is this, you know, huge wave of change that’s coming and, and currently in motion. And exchange traded derivatives reporting is now under a growing regulatory spotlight, if you like.
And so you mentioned earlier that overhauling these workflows can be very cumbersome and very difficult in many cases. Hence the appeal of this flexible solution that we’re talking about. But what did the participants at Boca actually say to you directly?
We had this roundtable, by all accounts it was very successful. You know, what were they saying on the ground?
ALEX: Yeah, not on the ground, on the boat.
HOPETON: On the boat, on the boat.
ALEX: But yes, they were talking about things around, you know, there’s being a big push in the industry to make these different operations more efficient. So they’re coming up with a new standard, the 30-30-30 standard. There’s the point of trade within 30 minutes we want to have that allocated. Within 30 minutes after that we want to have that cleared and all the different processes becoming more efficient. And with that efficiency gain, that just means that you have a more accurate picture of those positions at the point of reporting.
But the other thing that it does is that with these new volumes and these greater reporting burden on the banks, what we heard was reporting is ultimately not a value add proposition to these FCMs. Reporting is a requirement and some may even go so far to say that reporting is a burden.
And if you get it wrong, you have a lot of remediation effort to make sure it’s right. You have people staying after work and this is taking up resources, this is taking up resources that actually could be performing value add services to the bank, to their customers, providing better client support.
Also not understanding exactly where your positions are and who ultimately holds those positions. And misreporting or representing those to the clearing houses could result in inappropriate margin calls or dispersion of monies that may not be ultimately should go to those different firms and it may just cause undue capital strain.
So making sure that there’s a clear understanding of the position that it’s netted or grossed appropriately, that you can ultimately take advantage of the compression of collateral and margin held within these accounts is important. So getting those reports right is important because it helps you better suit and serve your clients well.
HOPETON: Alex, we appreciate your time.
ALEX: Yeah. No, thank you for having me.
HOPETON: Thank you so much. And for everyone listening, we appreciate you joining us today. If you’d like to hear more about what we’re doing in this space, visit our website, droit.tech. See you again.