Much talk has been made about the impact of Dodd-Frank but the European Market Infrastructure Regulation (EMIR) seems to have been the forgotten step child of derivatives regulation. That is all changing. Coming into the fore later on this year, EMIR’s mandates mean that bilateral execution and settlement will soon no longer be an option for over-the-counter (OTC) products. Now, the majority of vanilla interest rate swaps and credit default swaps will be mandated to be cleared through central counterparties, and reported to central trade repositories. Furthermore, firms will be required to support the individual segregation of customer accounts, driving up operational costs, as well as potentially impacting profitability by preventing net margining between customers.

Analyst firm Celent estimates in its ‘Greater Good but at a Greater Cost’ report that 90% of the buy side believes that aggressive regulatory changes and uncertainties are putting the most pressure on their businesses in 2013. Not surprisingly, EMIR, Dodd-Frank, and Basel III are expected to exert the largest influence on the economics of derivatives trading in the next two years. Brokers therefore are facing a reconciliation shake-up with implications for their back-office and derivatives reconciliation environment.

Changes to the derivatives market translate into unprecedented challenges for sell-side firms, and are forcing them to rethink the way they operate. Brokers need to look to adapt their back-office operations and derivatives reconciliation environment. This can achieved be by ensuring connectivity to both new and evolving platforms as well as through using higher levels of automation to improve process effectiveness, manage rising transaction volumes and minimize costs. Also essential is controlling and auditing end-to-end business processes to improve transparency and ultimately reduce risk.

The challenges posed by EMIR and other regulations are inescapable. With change being inevitable, taking steps to improve operations and derivatives reconciliation processes by adding transparency for reconciliations will enable brokers to turn this growing regulation into a competitive advantage. Only by delivering greater automation and accuracy across every aspect of their operations, and increasing efficiency as a result, can brokers gain control to turn this looming change to positive benefit.