Financial institutions will spend almost $500 million on new technology this year in a bid to automate credit derivatives trading and processing operations, according to US research consultancy Aite Group.
The extra spending on new systems represents a six-fold leap from 2004 when data was first collected and follows warnings from US and UK regulators about risk management practices in the credit derivatives market.
The credit derivatives industry is worth around $17,000 billion and the sector has doubled in size every year since 2002. Last September, 14 of the world's largest credit derivatives dealers were called to a meeting in New York by regulators to discuss the high level of unconfirmed trades littering back offices.
Since then the 14 dealers have exceeded their June 2006 target of a 70% reduction in outstanding confirmations, although a recent survey from the International Swaps and Derivatives Association (Isda) showed that in 2005 one in five credit derivatives trades by large dealers contained mistakes and many suffered settlement delays.
However, Aite Group says a large part the new investment in IT for credit derivatives processing comes from hedge funds and other asset managers, not just from the big banks.
Despite a rapid increase in credit derivatives trading, Aite says investment in technology infrastructure will cut overall costs over the next several years. Following the implementation of new technology the cost of processing an average CDS trade is expected to fall from $570 in 2004 to $270 next year and then reduce again to $190 in 2008.