The bulk of OTC derivative processing remains manual with many opportunities for error. A single contract, traded verbally and recorded on paper, can have between 80 and 100 variables of terms and conditions. Further, there are many hands involved in the process, as opposed to streamlined electronic transfer. Industry working groups, trade associations and the broker/dealer community have recently reconfirmed their intentions to automate clearing and settlement in this area. Technology vendors are addressing core processes - including trade affirmation, trade allocation, reconciliation and novation - and linking to utilities for legal confirmations. Investment managers and hedge funds, however, are reluctant to invest in the infrastructure.
"OTC derivative trade processing is unique in that counterparties are tied to each other in a way that does not exist in the listed markets," says Denise Valentine, senior analyst with Aite Group and author of this report. "Ultimately, a firm is only as automated as its counterparty's processing capability. It is for this reason, perhaps, that the buy-side predominately views this issue as one relating to broker/dealers. In fact, broker/dealers are often paying for development of solutions, either directly or indirectly, and for buy-side access to post-trade/pre-settlement technology."