Trading errors soar in credit derivatives market

Trading errors soar in credit derivatives market

Around one in five credit derivatives trades made by US banks last year initially contained errors, double the previous rate, according to a survey by The International Swaps and Derivatives Association (Isda).

The Isda survey of 67 financial institutions found that over-the-counter (OTC) derivatives volumes increased for all product categories during 2005. The largest increase was for credit default swap volumes, which doubled at all sizes of firm.

But credit derivatives error rates increased for the sample as a whole. Errors in trading equity derivatives more than doubled last year to 20%.

The Isda research also found that rebookings increased significantly during 2005, although this may reflect intensified efforts to reduce confirmation backlogs at the behest of the regulators.

The surge in errors comes as dealers move to automate paper-based settlement and tighten back office risk management procedures in the $17,000 billion credit derivatives market. Earlier this year the Federal Reserve Bank of New York said the world's major derivatives dealers had met initial targets for reducing the backlog of unconfirmed trades.

The Isda survey found that confirmation backlogs had decreased significantly for credit derivatives, which it says reflects increased industry and regulatory attention. But the logjams increased for both vanilla and non-vanilla equity derivatives.

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