Clearing and Prime Brokerage Systems Outdated, IBM Reports

Most of the clearinghouses and prime brokers are using outdated technology – and quite possibly leaving themselves mired in inefficiency and exposed to other market forces.

In a recent study from IBM and Minium (a Cinnober affiliate), the two reported that firms will not be able to deliver the right level of return on equity for their clearing and prime brokerage businesses without a “radical reassessment” of their technology stacks.

“What is missing is a system capable of ensuring a single source of truth with up-to-date trade information that can be accessed by different functions to ensure alignment of different risk, controls, and financial processes,” states the report, titled ‘The Way Ahead for Derivatives Clearing and Prime Services’.

It adds: “If that system could also produce a current view of collateral positions, including what has been pledged or recalled, control would be enhanced throughout the business.”

According to Global Investor Group, which first reported on the paper, Cinnober said it would launch a clearing and risk management service for banks and brokers in response to regulatory and cost pressures at the beginning of next year.

Cinnober’s clients include LME Clear, B3 (formerly known as BM&F Bovespa) and Japan Exchange Group.

Experts at IBM and Minium – which was set-up by Cinnober last year – suggest a sharper focus on costs is making traditional IT systems and operational processes look expensive and throwing the viability of entire business lines into doubt.

“We believe that there is an opportunity for firms that provide clearing and prime services to take a quantum leap forward by investing in new technologies that are tailored for modern businesses and aligned with the current regulatory environment,” the paper stated.

The main challenge is the evolving regulatory climate, in which financial institutions have seen their balance sheets shrink and are looking to implement measures to reduce costs and standardize processes.

IBM said the second major problem for banks and brokers protecting core revenue streams from competition from fintechs, while continuing to develop new offerings to meet clients changing expectations and preferences.

To tackle these challenges, the study suggests turning to new technology solutions such as open application programming interfaces (APIs), cloud computing, cognitive processes, and blockchain.