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Industry pressure drives required changes in OTC processing

In an FT article a few days back, Jay Hooley of State Street raised some concerns around the impact of OTC volumes on legacy systems. In my experience many firms today have developed limited capabilities for automating the OTC volume within their business.  Where it does exist it is often in silos, and does not cover the full life-cycle of the contract. At the same time, sophisticated solutions exist today that can process multi-asset class transactions in one central system. The buy-side, in fact, has a greater operational requirement to centralise middle and back-office functions across asset classes for confirmation and settlement processes to increase operational efficiency and reduce risk, and we are seeing those projects being delivered today


However, mounting pressure from the Fed, as outlined in their most recent letter in October 2008, is forcing all industry participants to change the way they process OTC derivatives. Furthermore, with the Fed now requiring 85% of electronic trades to be processed on T+0 and 94% of confirmations to be processed without modification, including novations, the use of existing silo based platforms, or even manually intensive operational procedures, is no longer viable.


This increasing pressure is welcomed in some quarters as it will require firms to not only consider new IT infrastructure and operational procedures, but also a change of mindset in the way confirmations are processed. Only with this new focus can firms hope to reduce the number of paper trades through the use of electronic platforms, eliminate material backlogs and streamline the OTC trade lifecycle to cope with confirmations as well as terminations and novations. 


This pressure is actively forcing firms to seek to identify the necessary steps to work towards implementing an operational framework capable of providing full post-trade event management support, while enabling product innovation and execution of investment.


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