The upcoming European Commission proposals on the reform of the Over The Counter (OTC) derivatives market are making companies realise the importance of having proper automated systems in place to effectively manage the post-trade processing of OTC derivatives. For example, a recent report by research and advisory firm Celent found that confirmations and affirmations still constitute more than half of OTC post-trade processing costs largely due to lack of automation.
“Companies realize that processes and systems will need to be reviewed and modified to comply with EC proposals on “standardized” OTC derivatives”, explained Gerrard Mahony, business development director at riskart – a leading Derivatives Management consultancy. “However, the real challenge will still lie with the management of exotic and complex trades, which will not be centrally cleared and which pose the majority of the risk. For example, the AIG trades at the time of the financial crisis were extremely bespoke and could not have been handled by a clearing house, and, in future, such instruments will need to be managed as part of a portfolio that comprises both bespoke and “standardized” OTC derivatives”
Derivatives are an incredibly useful tool in business to manage risk especially as they can be crafted to exactly address specific needs provide a vital edge in today’s competitive market. However, this very flexibility results in companies having to manage a portfolio of contracts that are each unique – a challenge that becomes more complex as the number of contracts grows and, in certain respects, this complexity will grow even further as OTC derivatives that are “eligible” for central clearing will, in future, need to be managed alongside bespoke, bilaterally negotiated derivatives.
The riskart Derivatives Management software has been designed from inception to be easy to customise so that it can adapt and evolve to meet the changing needs of the user, of the financial markets and keep up to date with new compliance regulations. A key aspect of this is that the customisation is done through changing parameters and options such that the source code remains unchanged and therefore there are no delays caused by retesting the software.
“Many small to medium sized companies still use manual process but increased trading or the introduction of standardized OTC derivatives will make it obligatory to automate,” explains Franco Marinotti, riskart’s CEO. “riskart’s long history of specialisation in this area is invaluable in helping the customers define and configure the automation process. Riskart offers a best-of-breed solution from a company that work closely with customers to continually improve the software rather than one from a large, one-size-fits-all software company.
“We spent a lot of time and money when creating the riskart software suite so that is highly flexible and can be tailored to provide solutions that exactly meet each customer’s needs. This sets us apart from rivals as we can provide solutions in a fraction of the time and at a fraction of the cost — with the ongoing benefit of being able to continuously evolve the solution in line with changing regulations, new instruments and new ways of doing business. Thus, in the case of one customer, we were able to complete the entire project in three months whereas rivals were quoting nearly a year and for other customers with less complex requirements, it can take as little as a few days to a couple of weeks.”
