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.