Tabb Group forecasts that nearly $170 million will be spent in 2010 by major sell-side broker-dealers to automate the affirmation process and mitigate the potential risk resulting from trade exceptions in the credit default swaps market.
Tabb senior analyst Kevin McPartland observes that while 90% of all CDS trades are confirmed electronically, same-day matching of new trades and novations is rare and error rates are unacceptably high. "This is a lot of money to risk on a phone call," he states.
The call for same day affirmations has recently been taken up by Omgeo, which commissioned a report from Oxera outlining the dangers to the industry in terms of risk and cost of not adopting automation of trade verification - particularly in times of market turmoil.
Supported by banks who already have the technology in place, Omgeo has been lobbying Brussels to push the issue further up the Euroopean public policy agenda.
While it is not the job of any single regulatory, technical or financial entity to solve the counterparty risk problem, all firms must create an automated, timely process ensuring decisions are based on accurate information, suggests Tabb.
"The benefits gained will far outweigh the money spent," says Andy Nybo, senior analyst and head of TABB Group's derivatives research service. "The number of staff needed to manage the novation process will decrease dramatically. Although difficult to measure, savings will also be realised through reduced capital requirements, lower potential for costly litigation due to unconfirmed trades and a reduction in losses resulting from operational errors in the trade process."