Capital Calculations: Markit's Updated Front Office System Allows Single-Application Calculation Of Capital Resources

As the Dodd-Frank Act takes further shape following regulatory announcements last week by both the Commodity Futures Trading Commission (CFTC), swiftly followed by the Securities and Exchange Commission (SEC), further corporate entities are moving toward ensuring that their services aimed at the institutional FX market take the reforms into account.

Today financial information services company Markit announced that it has enhanced its front office Analytics solution to enable financial institutions to calculate the costs of funding and capital resources of their OTC derivatives trades in a single application.

At this particular time, when regulatory reforms around the world such as the Dodd-Frank Act are increasing the cost of funding and requiring larger amounts of net capital, the new Integrated Resource Management (IRM) solution will enable customers to dynamically manage their balance sheet resources and optimize trading decisions prior to execution. IRM has been installed at a customer site, with implementation at other financial institutions under way.

Regulatory Responsibility

Under the Dodd-Frank Act, the European Market Infrastructure Regulation (Emir) and Basel III regulations, uncleared OTC derivatives will incur Credit Valuation Adjustment (CVA) risk capital charges, default risk capital charges and minimum initial margins.

Meanwhile, market participants trading centrally cleared derivatives will be subject to capital charges for default fund contributions and central counterparty trade exposures and will also be required to fund initial margin.

Firm Courts Top US Banks

Further preparatory action taken by Market is reflected in last month’s collaboration by the firm with a series of US banks. Markit signed Bank of America, Goldman Sachs, Citi, and Merrill Lynch as Futures Commission Merchants in order to provide clearing certainty for trades that are executed both electronically and in hybrid market places.

Paul Jones, Director of Markit Analytics, made a statement regarding the company’s upgrade to its analytics solution: "The economics of OTC derivatives are changing. There are numerous capital and funding costs that now need to be considered before executing a trade.”

“By bringing our established CVA, risk weighted assets and initial margin solutions together, our customers can run interactive scenarios with ease to understand the tradeoffs between these components. This was made possible by the speed of the Markit Analytics engine and is the first of its kind."

Financial institutions will use Markit's solution to price novation packages and renegotiate credit support annexes (CSA), helping them decide whether to move existing OTC derivative trades onto new Isda CSAs. Financial institutions will also be able to use IRM to replicate initial and variation margin calls under various stress scenarios.