Dodd-Frank and EMIR Derivatives Reforms: Impact on Derivatives Pricing, Valuation, and Technology Expenditures

by Cubillas Ding, November 17, 2011
Operations/ Benchmarking
EMEA, North America

Abstract

Celent expects that the move to electronic trading and central clearing from Dodd-Frank and EMIR will catalyze efforts to build out scalable, utility-like pricing infrastructures. Applications spending for front office pricing and middle/back office valuations is expected to reach US$634 million in 2014, growing at a CAGR of 7.2%.

Over the years, derivatives pricing and valuation practices have been shaped by both industry initiatives and regulations around capital adequacy, risk management, accounting standardization, and OTC derivatives trade processing and risk control objectives. Even before the 2008 financial crisis, there were discernible trends towards needing to align derivative pricing and portfolio valuation activities in order to strengthen front office pricing practices, achieve accurate valuations for off-balance sheet items on a mark-to-market basis, manage efficient collateralization, and improve governance and transparency to various internal/external stakeholders. With the impending implementation of Dodd Frank and EMIR on the horizon, these trends are not expected to slow down.

In a new report, Dodd-Frank and EMIR Derivatives Reforms: Impact on Derivatives Pricing, Valuation, and Technology Expenditures, Celent examines a number of regulatory scenarios that will shape business and competition dynamics and result in new market structures that are likely to change how price discovery or price formation mechanisms are delivered in coming years

“Broker-dealers’ ambitions to become ‘flow monsters’ are already precipitating the need for industrial strength pricing and market-making mechanisms that can handle increased trading volumes and ‘near instant’ reporting for pre- and post-trade transparency,” says Cubillas Ding, Research Director at Celent and author of the report.

Continuing on a series of reports on global derivatives regulation and market structure evolution, this report analyzes the impact of potential structural changes on derivatives pricing and valuation practices, technology delivery mechanisms, and associated IT expenditures.

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned subsidiary of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America
Michele Pace
mpace@celent.com
Tel: +1 212 345 1366

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81 3 3500 3023

Table of Contents

Executive Summary

3

Introduction

5

Regulatory Scenarios for OTC Derivatives Markets

9

Evolution of Technology Approaches for Pricing and Valuation

17

Derivatives Pricing and Valuation: Solution Dynamics and Technology Expenditures

21

 

Derivatives—Front Office Pricing

22

 

Derivatives—Middle/Back Office Valuation

24

What Next for Institutions and Solution Providers?

28

Conclusions

33

Appendix: Comparing and Contrasting Dodd-Frank and EMIR

34

Leveraging Celent’s Expertise

43

 

Support for Financial Institutions

43

 

Support for Vendors

43

Related Celent Research

44

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