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Buy Side OTC operational improvements : A Project for 2008?

Research just out from Tabb estimating that banks will spend $70 million on automating OTC derivatives processing this year is welcome,  yet it’s still a fraction of what really needs to be spent. Even if many of the big sell-side firms have invested heavily, there remain so many counterparties who have yet to even recognise that it is relevant to them. Most still stick to their comfort zone and that’s manual processing. BIS statistics for 2007 vs 2006 show a record growth of 135% in OTC derivatives volume. Markit research shows the average number of outstanding confirmations doubled year-on-year from 2006 to 2007. That means operational  performance issues, a massive impact on risk management procedures and firms working off poor data. If an asset manager adds 100 per cent more volume in a year, then they cannot just double the size of their back office operations as the people simply aren’t available – plus more staff maintains the risk of human error and reduces margin gain from greater volume. So what’s the message? Same as its been for a long time – now is the time to automate your OTC derivatives processing. Now is the time for the majority to take stock and make it a priority. 
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Comments: (2)

Gary Wright
Gary Wright 04 April, 2008, 10:01Be the first to give this comment the thumbs up 0 likes

Geoff

You raise an issue that might be impossible to solve completely. OTC by definition are bespoke transactions created to specific requirements of the issuer and their client. This bespoke nature causes non standard componants.

Its very unlikely that the buy side will have the motivation to invest in technology to build any automated solution as the transactions tend to be on a one on one basis. The nature of OTC derivertives causes them to be automatically highlighted against bog standard vanilla transactions and they are normally subject to far greater scrutiny by managment.

I understand your sentiment to bring automation but feel it is bridge too far, way over the horizon to be seen.

Paul Penrose
Paul Penrose - Finextra - London 04 April, 2008, 10:07Be the first to give this comment the thumbs up 0 likes As this Aite research note confirms, the buy-side continues to rely on broker-dealers to drive innovation. The top dealers are doing their bit, and technology vendors are addressing core processes, but investment managers and hedge funds are reluctant to invest in the infrastructure. And why should they? In the absence of a regulatory big stick the buy side will continue to coast while the sell side picks up the tab for the industry-wide operational improvements that are needed to remove the bigger systemic risks from the system.

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