The operational processes that support the both lucrative and risky asset class of OTC (over-the-counter) derivatives are opaque and inefficient – a situation unacceptable to both dealers and the Fed. New research from TowerGroup explores the pressure mounting on the industry to move toward electronification as trade volumes rapidly increase and as the benefits to investment managers, brokers, asset servicers, and industry utilities outweigh the challenges.
The depth of the problems and the possibility of increased regulatory oversight has brought the industry together to proactively improve standards, communications, and protocols. The Operations Management Group, consisting of 18 major financial institution stakeholders in OTC derivatives processing and industry groups, recently proposed self-imposed improvements to the processing of these complex instruments to the New York Federal Reserve Bank.
Participants in the OTC derivatives industry know that massive change is required to achieve true electronification. TowerGroup believes that in order to meet the pledged commitments outlined in the proposal, participants will need to further embed technology into the OTC derivatives process. A graphic demonstrating the immediate and future effects the commitments will have on the industry may be downloaded at: http://www.towergroup.com/research/content/page.jsp?pageId=3122
TowerGroup also finds that the thrust toward standardization will significantly improve the OTC process and that collaboration among industry participants is the winning approach. The key factors that will drive success are:
– Encouraging buy-side firms to connect to industry utility platforms
– Improving the standardization of OTC equity derivative contracts
– Aligning internal processes to take advantage of the offerings of industry
utilities
– Investing in OTC derivatives processing platforms to track derivatives
contracts, mitigate risk, and reduce cost of transacting in the OTC derivatives
space
– Automating key aspects of the process to realize benefits to all stakeholders
The TowerGroup research report titled "Avoiding More Regulatory Oversight in OTC Derivatives: The Best Defense Is a Good Offense," is authored by Stephen Bruel, an analyst in the Securities & Capital Markets practice at TowerGroup.
