Rising volumes and new technology push down OTC derivatives processing costs

Rising volumes and new technology push down OTC derivatives processing costs

Rising trade volumes and the introduction of new technology have almost halved processing costs for credit and equity derivatives, according to research by City-based market intelligence firm Z/Yen.

Z/Yen says its survey of of 16 major banks showed huge volume growth in the OTC derivatives markets, with trade volumes for credit derivatives up 75%, while equity derivatives volumes grew 86%.

These volume increases together with new technology and the take up of cross-market industry utilities led to big reductions in the market average operations cost per trade for credit derivatives, which fell 42% from $401 to $233, and for equity derivatives which reduced 43% from $385 to $220.

But for interest rate derivatives, the trend was reversed with the cost per trade rising from $181 to $209.

Jeremy Smith, director of financial services, Z\Yen, says: "It is clear that the industry needs to look further at the automation of interest rate derivatives. Cancellation of major STP initiatives and the lukewarm take up of cross-market utilities has meant that processing costs are not significantly lower than 10 years ago."

At the same time, Z/Yen says demand for staff increased which has brought a significant rise in the cost per head. The average fully loaded operations cost per head has risen from $123,000 to $133,000 per annum and this is fairly consistent across all products, though there is a small premium for credit derivatives staff.

Within operations, Z/Yen says the confirmation process is still the highest area of cost, particularly for interest rate and credit derivatives, with several banks spending over $100 on each trade against an average of $40 to $60.

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