UK regulator warns of back office risks in OTC credit derivatives

UK regulator warns of back office risks in OTC credit derivatives

The Financial Services Authority says that firms in the fast-growing OTC credit derivatives business are failing to keep their back office operational risk procedures up-to-speed with the latest market developments.

The watchdog has reminded chief executives of major participants in the UK OTC credit derivatives market that it is their responsibility to ensure that their firm has adequate back office systems and controls.

The FSA has recently become concerned at the high level of unsigned confirmations outstanding between counterparties for OTC credit derivatives with, in certain cases, transactions remaining unconfirmed for months.

Gay Huey Evans, FSA's capital markets sector leader, says: "Recent supervisory work has found that a number of firms in the fast-developing OTC credit derivatives market are failing to resource their back office functions adequately to allow them to keep pace with the growth of their front office business."

She acknowledges the importance of credit derivatives as hedging tools for diversifying risk, but states: "If simple operational procedures are unable to keep up with the pace of market development, the risk that misunderstandings and uncertainty will negatively impact market confidence increases. We will continue to monitor firms' progress on this issue"

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