Following the recent financial crisis, regulators have moved to cut the systemic risk associated with OTC derivatives, looking to improve transparency in areas ranging from trading to position reporting to counterparty exposure to valuations.

TowerGroup says both technology and operations must play a role in achieving transparency around these areas as well as improving risk management. Operational risk is an acute problem for OTC derivatives firms because of the manual nature of trading and post-trade processing. In addition, the post-trade lifecycle will require significant technology alterations and operational changes to accommodate the central counterparty clearing model.

The firm surveyed over 60 risk officers at OTC derivatives firms, including buy-side, sell-side and asset servicers. Of these, 80% consider greater transparency in risk management as a top driver compelling improved OTC derivatives processing.

More than 60% name counterparty exposure as a key driver for operational improvement while 45% cite regulatory compliance as the third most important driver, requiring considerable work on both technology and operations.

Vital post-trade functions of valuations and collateral management will receive the most immediate attention, as they are fraught with operational and technological weaknesses.

However, despite the regulatory push and high impact of clearing, more than 60% of firms have not determined, started, or even planned for a system to accommodate central clearing.

Stephen Bruel, research director, securities and investments, TowerGroup, says: "Regulators and market participants alike are clearly stepping up their efforts to instil greater transparency and control of products, activities, participants, and the infrastructure as a whole that supports the OTC derivatives business. TowerGroup believes as a result that three drivers will spur improvement initiatives: risk management, counterparty exposure, and regulatory compliance."

John Avery, partner, SunGard Consulting Services, adds: "Firms need to identify which improvements in applications and architecture will help them create new efficiencies in OTC derivatives processing, and improve their "regulatory IQ" to meet new requirements for transparency and central clearing."

Last month the Federal Reserve Bank of New York welcomed commitments by 14 major dealers to ramp up efforts to cut risks and improve post-trade automation and transparency in the OTC derivatives markets. In a letter to the NY Fed, the dealers outline new commitments to bring greater transparency and standardisation to OTC trading, implement collateral management best practices and expand the use of central clearing in the credit and interest rate derivatives markets.