03:17 PM
Strengthening Infrastructure for Credit and OTC Derivatives is a Must
Ben Bernanke was right to highlight the need to strengthen the financial infrastructure, and the infrastructure for managing CDS and other OTC derivatives in particular.
Recent market turbulence has led volumes of credit derivatives to soar, with some of our clients reporting up to three times more trades being executed than previously. While none of our client reported problems with these spikes, it is said that some dealers in the market had to restrict their trading to keep up with the processing of the increased volumes. In addition, the OTC derivative sector is such that new products are created every day, many bespoke and with different structures and challenges.
This heightened activity has increased the pressure on the operations departments at banks, brokers and hedge funds alike, who need to process and confirm and affirm each trade promptly in order to avoid undue exposure to risk. And in a climate of tightening budgets, few firms have been able to hire more staff to assist trade processing, exacerbating the situation further.
Against this backdrop, it is unsurprising that industry figures and supervisors are intervening. The Fed has set ambitious targets for processing derivatives trades and there needs to be significant investment in technology across the industry to meet these targets, improve their operations and reduce exposure to risk.
In particular, tier two banks and the buyside will need to improve the way they automate the processing of CDS and equity derivatives. Failure to invest will risk them becoming an increasingly large drag on the efficient operation of the dealers' processing, which will undoubtedly lead to even greater regulatory pressure.