TOWERGROUP: RAPID GROWTH IN OTC DERIVATIVES DRIVES TECH SPENDING AND PRESSURES BROKER DEALERS TO FIND TRADING SOLUTIONS

NEEDHAM, MA - 4 April 2007

Over the Counter (OTC) derivatives present unique challenges to money managers, institutional brokers, clearing agents, and technology vendors. They also provide relatively high margins, tailored exposure, unique financial solutions and incredible growth opportunities for all of these groups. New TowerGroup research finds that to participate effectively in this market, broker dealers require a trading platform with a wide range of specialized tools, including risk analysis, decision making support, trade entry, execution, and operational support.

TowerGroup predicts that spending by institutional brokers on derivatives trading technology applications will rise by a compound annual growth rate of 9.5% over the next five years, from US$915 million to a total of US$1.3 billion.

There is currently no single system in the OTC derivatives trading space that provides enough structure and processing capabilities to be called a single solution for a broker dealer. With the rise in market electronification and automation, TowerGroup notes that certain "vanilla" OTC derivative products can be handled effectively as they are. However, processing hybrid derivatives in a standardized manner will not produce positive results and will continue to challenge broker dealers.

"While the reality of OTC trading is more advanced than most believe, institutional traders confirm that there are significant areas of inefficiency that dealers need to address," said Stephen Bruel, analyst in the Securities & Capital Markets practice at TowerGroup and author of the research. "Due to the fast moving nature of the OTC derivatives environment, the industry is seeing increased spending on technology as well as increased pressure on technology firms to keep up with derivatives innovation. The successful management of these challenges will enable broker dealers to reap the rewards associated with this high growth, high margin derivatives business."

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