Staff shortages push up OTC derivatives processing costs

Staff shortages push up OTC derivatives processing costs

Despite rising volumes there has been little reduction in costs per trade for OTC derivatives, partly because of a shortage of experienced operations staff at banks, says London-based market intelligence firm Z/Yen.

Much of the growth in OTC derivatives volumes has come from manually intensive exotic or end-user trades, says Z/Yen, and so banks' costs have risen significantly.

In 2005 overall trade volumes were up 46% for credit derivatives and 62% for equity derivatives. but although trade volumes in the more-commoditised interest rate derivatives market only grew by 16%, for exotic trades the average increase was a hefty 83%.

These volume increases, together with the take up of cross-market industry utilities, should have led to significant reductions in the average operations cost per trade, but this has not happened.

The Z/Yen survey, which compared processing costs and volumes for nine major banks for 10 product types and 15 operations & IT activities, found that the cost per trade for a credit derivative has increased from $218 to $221, while the cost of processing an interest rate derivative has increased from $204 to $218. However processing costs for OTC equity options did fall from $152 to $135.

Exotic or structured trades are not readily supported by the banks' main processing engines and so require more manual intervention, says Z/Yen. This has contributed to an increase in staffing costs for banks as demand overwhelms supply for experienced operations staff.

Jeremy Smith, director of financial services, Z/Yen, says: "It is clear that the industry needs to look further at the automation of OTC Derivatives. Although utilities such as DTCC, SwapClear and SwapsWire are gaining market share, there is still a disjointed approach and for many banks, increased volumes can only be taken on with large numbers of additional staff."

The continued growth in end-user or client trades, rather than interbank, and the expense of complying with regulatory programmes such as the Fed's Steady State initiative have also kept costs higher says Z/Yen.

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