Addressing End-to-End Risks And Inefficiencies In OTC Derivatives


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Date: February 2010
Type: White Paper
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Overview: The over-the-counter (OTC) derivatives industry is in flux as regulators and other industry participants try to create a market structure that reduces the systemic risks associated with this product. The changes will be manifested in many ways, affecting such broad areas as liquidity and balance sheet management, but also lines of business and individual functions, particularly as these pertain to technology and operations. Missing from the current OTC derivatives life cycle of trading and processing are two key attributes: transparency and efficiency. In describing the OTC markets, the United Kingdom's Financial Services Authority stated recently that "measures designed to improve the transparency of these markets . . . can deliver a range of efficiency and risk benefits and should be a key objective of the proposed financial reforms." Technology and operations will also be a major factor in improving risk management in the OTC derivatives markets. In its role setting protocols and defining best practices in the business, ISDA (the International Swaps and Derivatives Association), influences how operations are configured and technology is applied, and will thus have a meaningful impact on firmsí efforts to manage risks. This impact will be felt in the area of operational risk -- the risk of loss from a lack of, or a failure to comply with, robust processes and procedures. Operational risk is an acute problem for OTC derivatives firms because of the manual nature of trading and post-trade processing.

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