Exchange market reveals chinks in post-trade armour
12 March 2014 New York
Image: Shutterstock
The push toward an exchange-traded derivatives (ETD) market has exposed gaps in the post-trade process used by market participants to clear and settle these transactions, according to the new study from Greenwich Associates.
The consulting firm found that derivatives market participants are prepared to make investments to handle increased trade volumes in the report, Cleared Derivatives Processing: A Strategic Approach.
After speaking with more than 50 buy-side operations professionals, the survey found that trade confirmations in exchange-traded derivatives remained a largely manual process for institutional investors.
Despite the growing use of electronic messaging to confirm trades, fewer than half of buy-side firms confirm and reconcile their trades in real time and nearly two-thirds of investors use manual methods including phone, email, fax and instant message, slowing the clearing and settlement process and increasing risk.
Many factors are driving increased trade flow volumes in the ETD market, and while regulations will continue to impact trading behaviour in the next few years, participants stated that traditional market factors are set to have a more significant impact on cleared derivatives markets going forward.
Roughly 80 percent of institutional investors said their changes in product usage are due to shifts in asset allocations and/or fund performance.
Nearly one-third of buy-side participants reported a shift from over-the-counter products to futures, and market data suggests that this number is likely to grow.
To address the issue, buy-side participants are increasingly spending on cleared derivatives processing. Greenwich Associates found an average spend of $800,000 annually on cleared derivatives processing.
In North America, nearly 60 percent of this budget is spent on human resources, with the rest spent on technology. More than 80 percent of respondents said they have no plans to hire new people, but instead plan to focus budget dollars on new systems to help streamline the process.
“In order to prosper in the exchange traded derivatives market, industry participants must ensure they have automated solutions in place that mitigate risk, process post-trade transactions consistently across all clearing methods and asset classes, and meet evolving regulatory demands and industry best practice,” commented Ted Leveroni, executive director of derivatives strategy and external relations at Omgeo.
The consulting firm found that derivatives market participants are prepared to make investments to handle increased trade volumes in the report, Cleared Derivatives Processing: A Strategic Approach.
After speaking with more than 50 buy-side operations professionals, the survey found that trade confirmations in exchange-traded derivatives remained a largely manual process for institutional investors.
Despite the growing use of electronic messaging to confirm trades, fewer than half of buy-side firms confirm and reconcile their trades in real time and nearly two-thirds of investors use manual methods including phone, email, fax and instant message, slowing the clearing and settlement process and increasing risk.
Many factors are driving increased trade flow volumes in the ETD market, and while regulations will continue to impact trading behaviour in the next few years, participants stated that traditional market factors are set to have a more significant impact on cleared derivatives markets going forward.
Roughly 80 percent of institutional investors said their changes in product usage are due to shifts in asset allocations and/or fund performance.
Nearly one-third of buy-side participants reported a shift from over-the-counter products to futures, and market data suggests that this number is likely to grow.
To address the issue, buy-side participants are increasingly spending on cleared derivatives processing. Greenwich Associates found an average spend of $800,000 annually on cleared derivatives processing.
In North America, nearly 60 percent of this budget is spent on human resources, with the rest spent on technology. More than 80 percent of respondents said they have no plans to hire new people, but instead plan to focus budget dollars on new systems to help streamline the process.
“In order to prosper in the exchange traded derivatives market, industry participants must ensure they have automated solutions in place that mitigate risk, process post-trade transactions consistently across all clearing methods and asset classes, and meet evolving regulatory demands and industry best practice,” commented Ted Leveroni, executive director of derivatives strategy and external relations at Omgeo.
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