The New Partner in OTC Regulatory Compliance


Already an indispensable member of the financial markets ecosystem, the data center is emerging as a strategic partner in firms’ regulatory and compliance strategies. While the data center is essential to financial markets because it offers security, scalability and proximity, among other benefits, its value is growing for the OTC derivatives markets for another reason altogether: it’s the “right” neighborhood.

Capital markets think tank AITE Group recently published a white paper entitled Connecting to the New OTC Derivatives Community’s Markets, CCP’s, Platforms, and Infrastructure. It lists a mind-numbing 37 competing Swap Execution Facilities (SEFs), potential OTFs (European equivalent of SEFs), and others. The Equinix data center ecosystem hosts 19 OTC participants, which means that it’s a neighborhood in high demand.

In his recent article for Fintech Law Report, John Knuff, General Manager, Global Financial Services at Equinix likens today’s data center to the original Wall Street Buttonwood Tree. He writes, “Today, close proximity of … systems inside a data center enables efficient, uninterrupted flow of information—just as stockbrokers together in one location birthed the precursor to the NYSE.” [1] As the OTC derivatives landscape continues to evolve, accessing those information sources – which include SEFs, counterparties and myriad others – within a data center is an efficient route that many firms are choosing to take. And those data centers that house a critical mass of these information sources have a distinct edge vis-à-vis their competitors.

Equinix’ Knuff argues that flexibility is essential as the OTC derivatives landscape evolves but he adds that being home to more than a dozen SEF’s is just the beginning. Knuff says, “We definitely are seeing firms become Equinix customers for optionality in the SEF race. But the SEF component is just one piece of the OTC derivatives ecosystem. Upstream and downstream connections to others in the OTC derivatives markets are just as essential. At Equinix, we have tools that help customers identify potential business partners that already sit within our active trading community.”

The sheer number of competing landscapes presents more than a strategic consideration; connectivity to the multitude of SEFs presents a large-scale technological challenge. A full 25 of the 37 SEFs have developed a proprietary API; only one, SwapEx, deserves special mention for featuring an open API. Strategic considerations aside, trading technologists and their employers are faced with the realities of resource allocation. IT budgets are already stretched tight and cannot generally accommodate the types of capital expenditures necessary to connect to all SEF contenders.  Thus, more firms are turning to data centers because they’re a practical way to optimize IT spend.

Given the ongoing fight for supremacy among those 37, market participants are either pursuing a strategy of connectivity to multiple SEFs simultaneously, or waiting in the wings until the winners have emerged. In both instances, the right data center is key. Physical cross connects within a data center to one or multiple platforms are possible – and the time to market for that physical connectivity is short when regulations evolve and leaders in the SEF field crystallize. Market participants admit that the pace of change in financial markets and associated technologies is taxing in the best of circumstances. Yet in the OTC derivatives space, technological change is compounded by global regulatory uncertainty. In the face of these challenges, data centers represent much needed flexibility. Data centers are also emerging as critical convergence points for OTC derivatives market participants. On top, experienced data center staff can help firms navigate this complexity.

[1] Knuff, John. “Adapting Market Structure & Regulation in a World of Electronic Trading.” Fintech Law Report, 17(3). (May/Jun 2014). Print.


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