By: Blythe Barber
There was plenty to talk about at last month’s International Futures Industry Conference in Boca Raton as trade tariffs and the prevailing political and economic uncertainty overshadowed the annual event organized by the Futures Industry Association. Trading activity is expected to increase in 2025 as market participants seek to manage risks and adapt to the fast-changing circumstances, a FIA survey showed.
As we noted before Boca, regulatory oversight of Exchange Traded Derivatives (ETD) is intensifying. This is due to the exponential growth in volumes, powered by electronic and algorithmic trading during the past 15 years. The most recent set of fines, levied in 2023, has made position reporting compliance a matter of urgency for the industry and is driving remediation efforts by participants to avoid penalties and the related reputational damage.
Against this backdrop, we were delighted to host an invitation-only roundtable in Boca for a group of senior industry executives to discuss how market participants, primarily futures commission merchants (FCMs), can accelerate improvements to back-office operations. The conversation centered on clearing, collateral and margin reporting as well as their place within broader Non-Financial Regulatory Reporting (NFRR) frameworks. Convening the event was a great way for Droit to start as a newly approved member of the FIA.
We heard how remediation efforts to regulatory reporting operations have long implementation timelines and carry costs that can often far exceed the actual regulatory fines levied on financial institutions to date.
First, there are the expenses of an external party auditing organizations from the front to the back office. While identifying shortcomings in one or more links in the regulatory reporting chain may be quick, it can take years before fines themselves are actually levied. Second, when failures are identified, then come the costs of remediation efforts. In addition, there may be back-reporting required to ensure the enterprise remains compliant in other regulatory areas, such as meeting its capital adequacy levels. Third, aside from the financial costs, there is the considerable amount of time that senior executives across an organization must devote to addressing the issues, something that too often is complex and slow.
Lessons Learned from the OTC Industry
Financial institutions have been here before, when dealing with aggressive enforcement by regulators on the over the counter (OTC) derivatives industry following the Global Financial Crisis.
The OTC industry has spent billions of dollars in new platforms and systems upgrades to keep pace with the slew of new regulations, such as the Dodd–Frank Wall Street Reform and Consumer Protection Act in the U.S. and the European Union’s Markets in Financial Instruments Directive (MiFID). Furthermore, organizations have had to contend with a constantly evolving regulatory environment from the rewrites of rules, including the European Market Infrastructure Regulation (EMIR) and changes brought by the regulators in Hong Kong and Singapore. In addition, they incurred more costs to update systems and to resource their back-reporting requirements adequately.
What was clear at our Boca event is how seriously the ETD industry is taking the regulatory reporting challenges. The OTC market’s experience has shaped how organizations are approaching regulatory enforcement, as an ongoing issue or as an operational risk identified in an audit. It is no coincidence that anecdotally, we are seeing a significant pick-up in consulting and advisory activity on responding to auditors’ findings and the increased risk of regulatory enforcement.
Technological advances drive industry change
Our guests flagged another major factor driving the ETD industry’s efforts to improve regulatory reporting: technology-led change. Middle and back office technology providers are migrating customers to new, scalable platforms that are better placed to handle the surge in trading volumes, something that is also heightening the need for organizations to modernize legacy systems.
Droit’s Quality Assurance solution enables institutions to replace manual checks on select data samples with a complete report validation of all reportable positions. This provides a far higher level of quality assurance, reduces risk and frees up teams to focus more on client services or other responsibilities, such as collecting margin payments. Our Quality Assurance solution provides institutions with the agility to adapt to regulatory changes far quicker than older systems.
We found senior executives at our event were particularly receptive to the flexibility Droit’s QA solution offers users, in setting rule sets and the speed of turn-around in updates in response to new regulations, built around a consensus interpretation. These features inspired confidence in ensuring the timeliness, completeness and accuracy of the reporting process.
Systems Agnostic and Flexible QA Features
What also particularly resonated is that the Droit QA solution is system agnostic, complementing rather than duplicating an institution’s existing technology. Consistently, we heard at Boca how institutions have already invested significantly in their systems, and there is a reluctance to revisit these decisions, given the complications of obtaining signoffs for new systems from multiple budget holders and business heads potentially affected by such a change. Aside from the cost, implementation and deployment of new systems require lengthy lead-in times and management engagement, they said. Droit’s agile and flexible platform, therefore, allows firms to maintain their current primary stack while acting as a complementary QA.
At the time of writing, financial markets are volatile as a result of the trade tariffs announced by the current U.S. administration. When we return to FIA’s Boca conference next year it will be particularly interesting to check the health of ETD transaction volumes and the lie of the regulatory landscape.