Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
OTC reporting coming close to a manager near you
(Pictured: Peter Tierney)
After the global financial crisis the G20 finance heads decided on three things: to have more over-the-counter (OTC) trading in electronic and lit markets; to have third-party clearing for settlements; and compulsory OTC daily reporting. The last one, at least, is being phased in now.
DTCC, the industry-owned global infrastructure provider for securities trading, has introduced its data repository for OTC reporting, which is currently applicable for Australian institutions with more than $50 billion in international OTC positions. Come October, the final phase will have no floor limit – all trades will need to be reported.
According to Peter Tierney, the DTCC Asia Pacific representative for the program, Australian regulators were quick off the mark with the scheme, which was launched locally last October, first signing up the big banks.
He said last week on a trip to Australia from his Singapore base that the responsibility for reporting during the final phase after this October will mostly rest with fund managers: “It’s up to whoever books the trades, which is normally the fund managers.”
He said, in any case, it should not be an onerous process. For small managers, they can access a simple web-based upload. They could also get the person (say, a bank) on the other side of the trade to report it, however the organization booking the trade needed to take responsibility for its reporting.
It is understood that the big Australian banks are looking to introduce a ‘delegation service’ for their fund management clients.
Tierney, whose experience in international trading and settlements dates back to the formation of what is now Omgeo (owned by DTCC) in 1991, said his main role was currently to support those organisations already on board in Japan, Singapore and Australia and to educate those which will be joining the scheme at a later date.
“Australia was smart,” he said. “The regulators introduced [last year] the concept of prescription whereby DTCC was allowed to be provisionally licensed to deal with the first Aussie banks which started with the program.” DTCC expects to get its full licence in July.
Since DTCC (the Depository Trust & Clearing Corporation) bought out the 50 per cent of Omgeo owned by Thomson Reuters last year, it has moved to adopt a broader support role within the international financial services industry.
Tierney said that the global financial crisis increased pressure on the big global banks to reduce their costs. So, they were looking at various aspects of their operations, he said, where they could share in the provision of services which offered no competitive advantage but improved the efficiency of the overall system. This meant an increasing and important role for DTCC.
