Fund Managers Ill-Prepared for Dodd-Frank Derivatives Reform

Although fund managers say that preparing to comply with the provisions of the Dodd-Frank Wall Street Reform Act is top of their agendas, they are pretty much in the dark about what to do, according to a survey conducted by SimCorp., a technology firm specializing in investment management.

SimCorp revealed that 72% of 60 firms it surveyed listed preparing for the new legislation as a top priority. Yet 13% said they don’t have the right systems in place and 64% don’t know if they have. About 15% said they couldn’t capture all the derivatives position, transaction and contract data in a single repository for an enterprisewide view of risk and performance; about 53% said they didn’t know if they could and only 32% said they could.

The Dodd Frank Wall Street Reform Act will require firms to execute many of their swap deals through electronic platforms; process many of their swap transactions through a centralized clearinghouse and report their transactions to a trade repository .

That will translate into maintaining daily records of OTC derivatives; submitting and making available reports regarding transactions, making margin calls and meeting minimum capital and margin requirements.

However, because the Commodity Futures Trading Commission and the Securities and Exchange Commission have not finalized the nitty-gritty rules to implement the financial reform legislation, fund managers have been hesitant to make technology investments. “I’m not seeing buy-side firms spend to the extent anticipated because deadlines for rulemaking have been postponed and there is still a lack of clarity,” said David Kubersky, managing director of SimCorp in North America.

He recommended that regardless of what the regulators finally decide fund managers have to prepare to decide which executing venues they want to use, perform enterprise data management, automated valuations and reconciliation with clearinghouses and brokers, automated margin calls and collateral management, reconciliation of trades with counterparties, real time communication of trade details and collateral with counterparties and clearing agents and real-time reporting of positions and trades.

“Regardless of the short-term costs, fund managers should embrace the new legislation as an opportunity to take a hard look at their systems and assess their ability to improve their pre- and post-trade procedures,” Kubersky said. “Whether trading in OTC derivatives or other financial instruments it is important to have a timely critical and accurate assessment of risk and returns."

According to Kubersky, investment funds had the impetus to change outdated technology and procedures,but could not execute their goals due to budgetary and other constraints now. Now they have the regulatory impetus to do so.

Dushant Shahrawat, senior research director of capital markets at Tower Group, said that buy-side firms will have an easier time than dealers in complying with the new legislation. The short term costs involved with IT and operational changes, he projected, will be offset by long-term benefits. “Adjustments won’t be easy. Trading costs might increase but trade volumes as fund managers get a better handle on the price at which they can execute orders and reduced counterparty risk,” Shahrawat said.