Participants in exchange-traded derivatives markets are urgently looking toward automation in the clearing and confirmation process, and their budgets reflect this priority. According to a new report from Omgeo and consulting firm Greenwich Associates, less than half of buy-side firms reconcile trades in real-time, and two-thirds of exchange-traded derivatives investors still rely on phones, fax machines, emails and text messages during the settlement process.
Manual confirmations increase risk, shown the by the average of 100 trade breaks monthly for buy-side firms, according to the report. This problem will only be compounded as more capital moves into derivative markets due to macro forces. The report notes that “a back-up in rates and unrest in emerging market countries are causing periodic volatility and spikes in volume” the rising cost of capital due to Basel III and other factors will likely mean long-term growth in the demand for exchange-traded derivatives, with event-driven spikes in demand all but certain. About 80% of institutional investors say they are looking to derivatives as asset allocations shift and fund performance becomes less certain. Almost one in three buy-side participants said they are seeing a move away from over-the-counter products.
Budgets reflect these trends. Greenwich Associates found an average cost of $800,000 per year on cleared derivatives processing for buy-side firms, and spending growth will overwhelmingly go to automation technologies and not human resources. “Automation is the only way to bridge the gap and drive consistency and operational excellence across a firm,” said Ted Leveroni, executive director of derivatives strategy and external relations at Omgeo, a global leader in automating trade lifecycle events. The company connects 6,500 clients in 52 countries worldwide.
To address these challenges in the derivatives clearing process, Greenwich Associates recommends looking to the cleared swaps market as an example, noting that while it is “not a carbon copy of the futures market, operational synergies should allow COOs to find cost savings by employing similar technology and best practices for both product sets.”
Greenwich Associates compiled data gathered from phone interviews with 51 exchange-traded derivatives professionals worldwide from both the buy- and sell-sides. Researchers asked respondents about the impacts of regulatory changes on “risk management, trade support, work-flow processes, trade reporting, and client service for ETDs.”
“While regulations must be adhered to, investors are getting back to doing what they do best—investing—and operations teams must be ready to support them,” said Kevin McPartland, head of market structure and technology research at Greenwich Associates. “The critical role operations teams perform to ensure the efficient clearing and settlement of derivatives transactions is more important than ever.”