An article relating to this blog post on Finextra:
OTC derivatives gain standards based on FpML
The International Securities Association for Institutional Trade Communication (ISITC) has released a new market practice for over-the-counter derivatives based around the Financial products Mark-up L...
Recently, the industry has focused on the communication between the two parties involved in OTC contract confirmation. Media attention has concentrated on the debate of market infrastructure and the role of the central counterparty. It’s good to see that
another important part of the OTC lifecycle definition has been completed with the delivery of ISITC market practice guidelines. The communication leg between the investment manager and third parties will be more cohesive especially with regards to the custodian.
Whilst initiatives such as SWIFTNet FpML have existed for a number of years, it lacked the standardisation of implementation guidelines. In addition, market practice enforces a consistent approach between what is sent and what is expected to be received
for specific OTC contracts for accurate and timely asset servicing. As with any market practice, initial pioneers will take part in the adoption cycle but as many network providers do not enforce market practice validation, adherence is optional and many
people will chose not to conform. With that being said, those that have a greater need for automation because their investment strategies involve a significant volume of contracts and post-trade contract management activity will reap the rewards, as standardizing
the information exchange will reduce the risk of contract data not being accurately exchanged.
As regulation increases in the OTC market and the cost of processing associated with regulatory compliance increases, it is likely that we will see many people consider whether OTC operations is something that they want to outsource or keep in-house. Having
an OTC Trade Notification Market Practice in place will assist standardisation of both models, those where the custodian is playing a traditional role and where the role is extended to outsourced middle and back office operations.