Technology helps smaller banks cut OTC derivatives processing costs

Technology helps smaller banks cut OTC derivatives processing costs

New technology has enabled smaller banks to significantly reduce their OTC derivatives processing costs, according to a survey by City-based market intelligence firm Z/Yen.

Z/Yen says one bank in particular has utilised new technology to reduce its headcount by 75% with the result that an interest rate swap now costs less than $100 to process.

The survey also calculated that the cost per confirmation is between $15 and $60 and the cost per settlement is between $20 and $100. Z/Yen says participation in industry initiatives such as SwapClear and DTCC can help to drive down these costs.

For credit derivatives, banks have made significant efforts to automate the processing of 'flow' trades, such as credit derivative swaps, which now have an average of $390 per trade, which is only 40% higher than vanilla interest rate swaps ($280).

Cost per operations head varies widely between firms from a high of $155,000 per year to a low of $75,000. This is primarily due to location with those banks still processing in central London being much more expensive.

Jeremy Smith, Z/Yen's director of financial services, says: "At a time when most banks are planning to reduce costs by relocation, it is clear that technology is still the key to promoting efficient processing.

"While relocation can save costs in the short-term, the survey proves that without well-focused investment in IT, there will always be the need for large numbers of staff in back-office functions."

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