In today’s FT, JP Morgan announces its derivatives trading re-engineering effort – 3 years in the making, and baking.

Is this what everyone else means when they say preparing for regulatory compliance?

Probably not.

But this is what competitive differentiation looks like for JPM, so far (apparently):

– 4 technology program pillars (and 24 workstreams) of a strategic re-engineering effort (sponsor: J. Dimon).

• Core trading platforms rationalization – rationalize application footprint, share pipes and plumbing between what’s left, plug into the same critical platforms;
• Derivatives clearing, operations and STP workflow upgrades
• Back Office systems upgrades
• Critical Platforms re-engineering – where a lot of the neater stuff’s been percolating. Athena (which sounds like the single platform the FT is referring to – the shared risk, valuation and trade management platform with its common object store, DAG, node ranked calculations, and event-driven recalc), at least one (Python based) derivatives DSL, a global model library (with FPGA optimizations on several models).

– Market making rationalization – one primary market maker for each asset class regardless of eventual risk owner.

… build a juicer, corner the melon market and prove that dyslexia never stopped anyone from succeeding.

The Tabb Group – in a 2011 presentation to the Commodity Futures Trading Commission’s (CFTC) Technical Advisory Committee  – estimates that the largest US OTC derivatives dealers will spend a total of $1.8B on Dodd Frank (DFA) related technology costs; with the top eight spending over $1.5B.

An August 2012 update to a 2010 S&P analyst report puts its annualized estimate of DFA-related technology and related expenses for the top eight US banks at $2.0/$2.5B.

Throw in the profound and fundamental changes the regulations have wrought on OTC derivatives market structure, business models, terms of competition and future earnings expectations – and that’s a lot of chucked lemons.

All those lemons however present an opportunity for competitive differentiation.

This new Acuity Derivatives client report From Regulatory Compliance to Technological Advantage (making lemonade…) seeks to show that given the fundamental nature of changes to the OTC derivatives industry and also the high technology costs involved; that the deployment of this technology spend should not be viewed solely in the context of sunk compliance costs, but in the context of investing for competitive technology advantage.

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