Preparing for the Uncertain Future of Derivatives Servicing
Presenter: Thomas Dinneny
Managing Director
Global Derivative Services Technology
J.P. Morgan
Preparing for the Uncertain Future of Derivatives Servicing

Agenda
 Regulatory Changes Affecting the OTC Derivatives Industry
 Impact of Regulatory Changes on the OTC Derivatives Market
 GDS Strategy
OTC Derivatives Regulatory Changes
Regulatory Timeline
July
Sept
2008
2009
Lehman Brothers
Collapses
Sept
2010
Dodd – Frank
Act signed into
law
European Union
proposal on OTC
Derivatives rules
July
2011
OTC
Regulatory
rules to be
completed by
SEC and CFTC
Dodd-Frank Act Highlights

Central clearing of standardized derivative contracts

Registration of swap dealers and major swap participants

Margin requirements for uncleared transactions

Reporting to central repositories for OTC Derivatives trades

Volcker Rule – restricts proprietary trading for banks

Limits on bank ownership of clearinghouses

360-day period for SEC and CFTC to define the rules for implementation

296 Days until deadline of July 15, 2011
Central Clearing for Standardized OTC Derivatives Trades

What is central clearing



The central counterparty intermediates transactions and mutualizes counterparty credit risk
across all member organizations
Why central clearing for OTCs?

Counterparty credit risk mitigation

Position portability post default

Transparency to collateral terms

Segregated initial and variation margin in a client’s dedicated account

Valuation certainty with daily variation margin transfer
Swap Execution Facility

Pre-Trade transparency

Multi-lateral

Post-trade transparency

Real-time reporting
Standardized OTC Derivatives Market Changes
Current
Proposed
Possible Central Clearing Workflow

Several models currently underway:

Client will execute trade on a Swap Execution Facility

Trade will be submitted for confirmation; however, as part of the confirmation process an intent to
clear the trade will be included

Subsequent to confirmation the DCM will accept the “give-up” message

Once accepted, the Central Counterparty will intermediate the trade between the client and its
executing broker via the DCM
Trade
Execution
Executing
Dealer
SEF
Client
Give-up to DCM
Executing
Dealer
Counterparty Risk
Mutualized
CCP
Market Risk Flat
DCM
Counterparty Risk
Mutualized
Bifurcated Market
Non-standard Swap Market
Standard Swap Market

Higher margin requirements

Pre and Post Trade Transparency

Greater transparency into counterparty exposure

Real-time reporting

Counterparty exposure is mutualized
Central Counterparty
 Initial Margin and Daily Variation Margin
 Position Portability Post Default of Clearing Member
 Counterparty Credit Risk Mutualized
GDS Strategy
DerivClear®
Confirmations
Industry Utilities
Buy Side Clients
Markit/SERV
Trade
Trade Processing
Lifecycle Activity
Activity
DTCC/TIW
Confirmations
Central Settlement
Settlements
Cashflows
DCM/CCP margin
Independent Valuations
Reporting
Collateral Management
Reconciliations
Trade Data
DerivClear – Trade Capture

The Goal
 Receive and process client trades with no manual intervention by J.P. Morgan
Operations personnel

The Challenges
 Connectivity with clients
 Standard Message formats
 Minimum data requirements
 Common reference data
 Product coverage

The Solution
 DerivClear – Electronic Trade Capture
Standard Message formats

Proprietary spreadsheet format

FpML - IBML

Bloomberg – future state

Challenges
 Versioning – upgrading to new versions/formats
 Client specific data
 Changing Standards
Connectivity with Clients

Loosely coupled
 Manual Trade Capture through the web interface
 Spreadsheet/CSV file upload through the web interface
 SFTP files

Tightly Coupled
 Web Service Interface
 MQ Interface
 SWIFT Messages
Minimum Data Requirements

Client systems have varying degree of support for Derivatives

Data requirements are different based on services provided
 i.e., Pricing requires less data than confirmations

Defaulting
 Application level defaulting
 Master confirmations
 Trade templates

Product Coverage
 High volume flow products have the greatest return
 34 products across Credit, Rates, Equities, Commodities and FX
Confirmations and Settlements

Confirmations
 Automated interface to MarkIt Trade Manager
 Direct links with DTCC
 Lifecycle Management

Settlements
 Cashflow calculation
 CLS settlements interface
 Netting
Independent Valuations, Collateral Management
and Reconciliations

Independent Valuations
 Ability to calculate independent valuations for most products
 Links to Third Party Valuation Providers (e.g., MarkIt, Super D, Reech, Pricing Direct)
 Pre-NAV validation nd flexible tolerance rules

Collateral Management
 Currently feeding valuations to DCM
 Product integration planned over the next 12-18 months

Reconciliations
 Internal system to system reconciliations using Artemis
 Interface to MarkIt PortRec
 File feeds to TriOptima
Scalability
 Load-balanced web-server farm
 Multiple Calypso data servers
 Oracle RAC database
DerivClear Architecture
DerivClear – Trade Capture
DerivClear – Transaction Monitor
DerivClear – Background
 Developed over a period of 5 years
 Grew along with industry change agenda

DTCC Electronic Confirmations - 2003

DTCC TIW - 2007

DTCC Pay/Rec and Central Settlements - 2007
 Global support team – US, UK, India
 Support for Credit, Rates, Equity, Commodities and FX Products
Keys to Success

Choose the right solution for the organization
 High volumes with strong tech capabilities
– Tightly coupled option
– SWIFT Messaging
– IBML through IX
– Requires ongoing support from both tech organizations
 Low volume with limited tech capabilities
– Loosely coupled option
– Manual trade entry
– Spreadsheet upload
– Limited tech support required
 Partnership between Tech and Ops Organizations
Questions?
Methods and Tools
Operating
Model
Goal
“BPIC”/
COE
Projects
Approaches to accelerate delivery of
business value to clients and internal
users
BPM
Architecture
Methods
and Tools
Key Practices






Modified Agile, where appropriate
Backlog management (product, release, iteration)
Team training and coaching
Enterprise Information Management tool (Ab Initio)
Modeling tools (ProVision, etc)
Involvement of User Experience Team
Architecture
Overview
Goal: Deliver BPM automation within the
complex reality of many back-end
systems
Operating
Model
“BPIC”/
COE
Projects
Guardrails:
 Limit BPM implementation complexity
 Implement BPM in-process when possible
BPM
 Don't assume a rules engine as a pre-requisite
 Model the flows before buying the tool
 Rules engines demand a significant shift in design
approach
Architecture
Methods
and Tools
 Don't choose BPM tools to reduce the time to
perform a release
Key Components
Technology stack
 Commercial product (PEGA)
 Open Source (jBPM)
 Middleware (MQ)
 UI development – within tool (Pega)
or as wrapper (jBPM)
Embedded workflow solutions
 SunGard's Infinity
 JPMC IB applications
 Bravura
 pControl
High Level Architecture
User Interaction
Pega Generated (java/jsp), FLEX, Java/JSP
Business Rules
Pega (Rules Engine), DROOLS (Open Source)
Business Intelligence
Systems
Management
Eclipse / FAST, Pega
Cognos, Systar (BAM), Datastage (ETL), Pentaho (ETL)
Development
Tools
Eclipse / FAST, Pega
Integration
MQ Series (Messaging), WSDL/Web Services
Process Management
Pega (BPM), jBPM (BPM), Sungard (Infinity), Systar (BAM), pControl
Application Server
Tomcat / FAST Stack, Websphere
Data / Metadata
Oracle (DB), Ab Initio (Metadata)
Identity
Management
SSO (Siteminder)
Projects
Common Characteristics
 Focused on improving business
Operating
Model
processes and the client experience
 Subject to boundary and time span
crossing
“BPIC”/
COE
Projects
 Involvement of multiple parties for
end to end execution
BPM
 Require processes to adapt to an
evolving operating model
Architecture
Methods
and Tools
 Desire for end to end management
oversight
 Desire for delivery of value over time
 Significant size and complexity
Six Key WSS Projects
1. Implementation Manager (production): On-boarding and account maintenance
processing – 1,900 users
2. FORTE (deploying to production): Initiating, processing, and tracking
investment orders for Fund of Funds - 600 users
3. Custody Foundation Project (in progress): Modeling of custody processes,
data and business rules as a foundation for future state requirements
4. Picasso (in progress): Web reporting with client dashboards and approval
processing for Hedge Fund and Private Equity Clients – 1,000 users
5. Client Service Workstation (inception): Inquiry resolution processes – 3,000 to
6,000 users
6. NAV Control for Global Fund Accounting (inception): NAV tracking and
processing – 3,300 users
Wrap Up
Key Takeaways
 Expansion of BPM as a strategic competency requires an evolutionary
approach supported by a roadmap
 Processes will evolve and change - project delivery methods and solutions
need to be adaptable
 Projects of the size and complexity in our environment need interim
delivery of value and constant business validation
 BPM initiatives cannot succeed with tools and methods alone – other key
elements include:
 A process and performance driven mindset
 Strong business involvement
 Executive alignment
Questions?