As the SEC and CFTC prepare to release their first wave of drafted OTC derivatives regulation, firms on the buy-side are looking to invest in new technologies and software to help them be compliant with the coming rules, as well as address the core issues driving the pending regulatory framework changes. The global economic crisis has placed counterparty, credit and systemic risk on the front burner for many in the financial industry. Finding the right solution to address the portfolio risk issues that contributed to the financial downturn will be crucial for the buy-side to not only be compliant with the upcoming rules, but to manage the inherent risks of the OTC derivatives market.

Driven by the Dodd-Frank Act, regulators in the U.S. are now tasked with drafting rules designed to bring greater transparency and efficiency to the OTC derivatives industry. The bill takes a step in the right direction by requiring that most OTC derivatives trades be executed via a swap execution facility (SEF) or an exchange, and be cleared through a clearing house. This, along with the requirement that customized swaps be reported to central repositories, will bring OTC derivatives trades into the open, lowering risk and adding efficiency to the market.

However, these mandates alone might not be enough for the buy-side to protect itself against portfolio risk exposure. The buy-side is looking for solutions that will provide the necessary position keeping, connectivity and other risk-management tools they need to process OTC derivatives trades, as well as trades in other asset classes. The right cross-asset solution will also manage the firms’ credit exposure with counterparties and collateral risk, covering the whole straight-through processing (STP) process, including investment management, risk management, middle/back office and accounting.

Buy-side firms also need to be able to mitigate risk globally, as the European regulatory bodies hammer out their own version of the new OTC derivatives rules. The right solution will be able to help the buy-side be compliant with global regulations, while giving the client a holistic view of global risk exposure.

Technology vendors, such as Sophis, are very well-positioned to meet the demand from the buy-side. By providing one system that has the ability to process OTC derivatives trades front-to-back, from trade execution through clearing, technology vendors will help financial institutions to avoid the kinds of risk that helped cause the recent global financial turmoil. The buy-side is looking for solutions that offer a full range of risk analytics and scenarios available in an integrated front to back office platform for portfolio managers, risk managers, compliance officers and CIOs.

Having the right portfolio management system that effectively manages market and counterparty risks is no longer a nice-to-have, but a need-to-have for buy-side institutions. Even before regulators draft the new rules based on the Dodd-Frank Act, financial firms are looking for ways to manage and minimize their portfolio risk exposure.