The spirit of New Year has been the same throughout history; looking back at the old year and resolving to do better in the next. This annual goal-setting is something those who work in corporations are used to. New Year is simply a ‘performance review’ and objective setting exercise.
I think New Year resolutions are nonsense, but I do think regularly reviewing progress and aiming to do better is a good thing. And so, it seems, does the derivatives community.
As an asset manager who spent a lot of time and effort on improving its derivatives capability over the course of 2007, I have watched as the industry has moved quickly to address operational inefficiencies. Seeing both the front office and back office’s points of view, I am used to watching the market race ahead continually dragging operations with it. This constant market innovation is what derivatives market participants are used to but this market innovation doesn’t help those running operational processes and systems, particularly if they are looking after other long-only assets too.
Recently I have seen a change. Some operational teams have been getting more comfortable with change and market innovation too, and the light has gone on in both the front and back offices at the same time. It is as if both teams have simultaneously realised; "If we work together we can come up with a better solution." This doesn’t surprise me. I’ve spent time in both the front and back office and I know individually people are very willing to help each other to provide a solution. It also helps that there is an innovative independent sector eager to assist. This is very important as the institutions cannot solve this alone.
And looking back this industry has made real progress. With the recent credit market turbulence we have not seen headlines telling a story of operational issues; the focus was elsewhere. The last time there was a similar market shock, some inefficiencies in confirmation processing were exposed. In the meantime, systems and processes have improved to enable us to deal with more non-standardised OTC contracts so that we are in a better position know what we have traded and with whom, and what collateral we hold. Looking forward, I expect the pace of innovation to continue, especially as the front and back offices increasingly collaborate to make grander operational improvements. And such progress comes just in time as in 2008 more participants will enter the market as derivatives become mainstream.
Derivatives are no longer quite so scary but what goals should there be for the industry 2008? I have my wish-list, do you? Send me yours.
