Legacy clearing threat to OTC derivatives warns State Street

Legacy clearing threat to OTC derivatives warns State Street

Rising volumes of over-the-counter derivatives trades are threatening to swamp legacy clearing and settlement systems, warns State Street in a report that calls for a co-ordinated industry-wide effort to develop a new post-trade servicing regime for the industry.

"It is crucial that the sell-side community, the financial services industry and regulators work together to develop new approaches to processing and servicing these complex transactions," says Jay Hooley, president and chief operating officer of State Street. "Our report frames the issues that are key to success, and encourages discussion about the most effective ways to address standardisation and the adoption of industry best practices."

The State Street 'Vision' paper contends that the volume of OTC trades may prove a challenge for legacy technology systems. The systems used to process these trades were originally designed for traditional equity and fixed-rate transactions, but are now handling non-traditional trades as well.

Neil Wright, senior vice president and product manager for derivatives servicing at State Street contends that growth in the derivatives space and the customisation of many products, raises questions about risk management and post-trade administrative support for these transactions.

"The challenge lies in capturing and recording all of the relevant features and terms contained in a transaction," he says. "With increasing volumes and complexity, the range of procedures to confirm, process and otherwise manage the trade life-cycle of OTC derivatives needs to be automated. In addition, providers will need to keep pace with the increasingly sophisticated analytics needed for derivatives trades."

In relation to the servicing and administration of derivative trades, State Street's report says that greater consistency of information, a more streamlined flow of reporting, rigorous statistical analysis, independent pricing and risk modelling, and superior expertise and insight are needed to work effectively with the data.

All of these features will require a significant investment in infrastructure, technology and human capital, the paper states.

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