The paper comes just before the New York Federal Reserve is expected to meet February 16, to discuss dealersâ and industry executivesâ progress on these issues. Credit derivatives are financial contracts that allow market participants to assume either a positive or negative exposure to a companyâs credit to facilitate hedging and speculation.
âAlthough the size of the credit derivatives market has exploded, the backlogs and inefficiencies in its current technology infrastructure have created a transaction, confirmation and clearing process straight out of the seventies,â said Robert Benedetto, a manager with BearingPoint and co-author of the paper. âThe extensive backlog in processing trades can create substantial operational risks for banks and other financial services companies.
âIn fact, the overstressed credit derivatives market infrastructure has created the potential for a financial disaster if an event triggers a significant strain, such as a major U.S. company filing for bankruptcy. Unless this technology is updated and improved, the industry will continue to operate with lead weights and put the health of the market overall at risk,â added Benedetto.
Terence Sawchuk, a management analyst with BearingPoint and co-author of the paper, pointed out that most credit derivative trades are not standardized and have to be reviewed individually by each party, raising the possibility of error and extending the time delay on trade execution. Sawchuk noted that the paper outlines steps that can be taken to improve the credit derivatives market, such as a new process for confirming trades and insights that can help companies avoid delays, leverage new technology and take a fresh look at processes and people to maintain business stability.