Steep Drop in Processing Costs for OTC Derivatives

The rise in trade volume for Equity and Credit Derivatives has led to big reductions in the Cost per Trade reports a survey by Z/Yen Limited, the city based Market Intelligence firm. However, processing costs for more traditional products, such as Interest Rate Derivatives, have remained static.

2004 saw huge volume growth in the Equity and Credit Derivatives markets as can be seen from the table below. Trade volumes were up 75% for Credit Derivatives and 86% for Equity Derivatives.

These volume increases together with new technology and the take up of cross-market industry utilities, have led to significant reductions in the market average Operations Cost per Trade for Credit and Equity products, e.g., Credit Default Swaps and OTC Equity Options.

• For Credit Derivatives, the Cost per Trade reduced from $401 to $233;
• For Equity Derivatives, the Cost per Trade reduced from $385 to $220.

However, for Interest Rate Derivatives, the trend was reversed with the Cost per Trade rising from $181 to $209.

At the same time, it is clear that demand for staff has increased and this has brought a significant rise in the Cost per Head. The average fully loaded Operations Cost per Head has risen from $123,000 to $133,000 per annum. This is fairly consistent across all products, though there is a small premium for Credit Derivatives staff.

Within Operations, the confirmation process is still the highest area of cost, particularly for Interest Rate and Credit Derivatives with several banks spending over $100 on each trade against an average of $40 to $60.

Jeremy Smith, Z/Yen’s Director of Financial Services, said, "It is clear that the industry needs to look further at the automation of Interest Rate Derivatives. Cancellation of major STP initiatives and the lukewarm take up of cross-market utilities has meant that processing costs are not significantly lower than 10 years ago."

The survey compared processing costs and volumes for 16 major banks for 10 product types and 15 operations & IT activities.

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