But the analyst group says although rapid growth in OTC derivatives is driving technology spending there is currently no "single system" for broker dealers that provides the structure and processing capabilities required.

With the rise in e-trading and automation, TowerGroup says certain "vanilla" OTC derivative products can be handled effectively as they are, but processing of hybrid derivatives is continuing to challenge broker dealers.

In order to improve processing, TowerGroup recommends that firms remove legacy systems that don't support new volumes and products and combine derivatives trading systems with a service-oriented architecture (SOA) to aid in the integration of disparate trading applications. Dealers should also look to harness extra computing power for complex risk measurement through the use of Grid computing.

Firms should also develop a vendor management system, says TowerGroup, and determine which suppliers have developed modules that represent emerging industry standards.

Stephen Bruel, analyst in the securities and capital parkets practice at TowerGroup, says: "Due to the fast moving nature of the OTC derivatives environment, the industry is seeing increased spending on technology as well as increased pressure on technology firms to keep up with derivatives innovation. The successful management of these challenges will enable broker dealers to reap the rewards associated with this high growth, high margin derivatives business."

Last month the Bank for International Settlements called on financial firms to introduce automated systems to cut confirmation backlogs in the over-the-counter derivatives markets.