OTC automation: Not a bridge too far

Improving post-trade processing capabilities is imperative when more than 50 per cent of a client’s workload can be spent dealing with terminations, novations and amendments – let alone getting in place the basics for trade confirmation and payment processing.  While OTC derivatives volumes are not as explosive as earlier last year they are still significant and are firmly on the risk and regulatory radar. The move by the Fed requiring 75 per cent of OTC derivatives confirmations to be electronic by January 31, 2009 for all subsidiaries of US companies means that efficient operational capabilities are a pre-requisite rather than a ‘nice to have’.

As a result, automation for the buy-side has to fast become a reality - especially in the current climate, where firms are being asked to process more with less people.  The cumulative costs of errors and the potential trade exposures are too huge to ignore.

And it is a reality, not a bridge too far. Buy side clients are already looking to broaden operational capabilities across multi-asset classes through a single, integrated post trade processing platform.  In fact, one of Europe’s leading asset managers recently went live with a strategic deployment, building on an existing implementation that covers securities, foreign exchange and money markets, alleviating the operational pressures of OTC credit derivatives processing.

Sure, OTC derivatives are created to meet the specific requirements of the issuer and the client and subject to a raft of variations, so the buy side must adopt a flexible infrastructure to meet processing challenges. 

Automation within the buy side has not been adopted to the same extent as within cash securities but there needs to be a more open attitude to what can and can’t be processed and the benefits of automation capabilities that are available today. Automate OTC derivates where they are vanilla – 90 per cent of credit-default swaps are now confirmed electronically and this is due in no small part to the industry making a concerted effort and recognising that less vanilla transactions are maybe less suitable for STP at present. That said, if buy-side operations take a multi-asset class approach you can get a powerful automated solution that ensures real-time awareness of exceptions, risks and status, within a single post-trade processing platform.  That goal is achievable today.