OTC derivatives processing remains manual, making trades slow to confirm. Credit derivatives are among the most rapidly confirmed, benefiting the most from industry automation.
A new report from Aite Group, LLC provides a buy-side view of OTC derivative processing. The report reveals that while the industry has made progress in automating the OTC derivative post-trade process, particularly in credit derivatives, the buy-side continues to rely on broker-dealers to drive innovation.
The bulk of OTC derivative processing remains manual with many opportunities for error. A single contract, traded verbally and recorded on paper, can have between 80 and 100 variables of terms and conditions. Further, there are many hands involved in the process, as opposed to streamlined electronic transfer. Industry working groups, trade associations and the broker/dealer community have recently reconfirmed their intentions to automate clearing and settlement in this area. Technology vendors are addressing core processes – including trade affirmation, trade allocation, reconciliation and novation – and linking to utilities for legal confirmations. Investment managers and hedge funds, however, are reluctant to invest in the infrastructure.
"OTC derivative trade processing is unique in that counterparties are tied to each other in a way that does not exist in the listed markets," says Denise Valentine, senior analyst with Aite Group and author of this report. "Ultimately, a firm is only as automated as its counterparty’s processing capability. It is for this reason, perhaps, that the buy-side predominately views this issue as one relating to broker/dealers. In fact, broker/dealers are often paying for development of solutions, either directly or indirectly, and for buy-side access to post-trade/pre-settlement technology."
This 33-page Impact Note contains 13 figures and six tables. Clients of Aite Group’s Institutional Securities & Investments service can download the report by clicking on the icon to the right.