New York, NY, USA
May 15, 2007OTC Derivatives: The Post-Trade
Landscape for Hedge Funds and Asset Managers
Report Published by Celent
Global technology spending
on OTC derivatives processing will increase from $187.8 million to
US$232.5 million by 2011. But the buyside is not as actively involved in
these automation efforts as is needed.
Growth in the derivative market has
outpaced operational capacity and in-house expertise, affecting everyone—money
managers, fund administrators, and prime brokers. The majority of the
over-the-counter market trades and post-trade activity is done over the
phone or by fax. The financial service industry as a whole has made great
progress in credit derivatives, but there’s a long road ahead. The
buyside has not been actively involved in this shift, according to a new
report, OTC Derivatives: The Post-Trade Landscape for Hedge Funds and
Asset Managers. The challenge for money managers and broker-dealers is
to automate processing. Potentially, the next five years will be a new era
of collaboration, technological creation and an amazing race where the
finish line is a win for all.
The global technology spending on third
party solutions for automating OTC derivative support in the
post-trade/pre-settlement area is US$187.8 million. Celent anticipates a
four-year annualized growth rate of 5.5% with total spending reaching
US$232.5 million by 2011. These figures include solutions functioning
across the process steps discussed in this report and do not include the
point solutions that focus on one element, such as collateral management
or content management platforms.
Some fund managers are willing to cope with
manual processes on small amounts of trading; others rely on services
provided by prime brokers. For some firms, the complexity is so
challenging that outsourcing to fund administrators is the ideal approach.
“It is estimated up to 30% of OTC
derivative trade confirmations contain an error (or errors) and require
subsequent handling for rebooking or amendment,” says Mayiz
Habbal,
managing director of the Securities & Investments group at Celent. “The buyside purchaser of
technology for derivatives processing is still a rare bird. However, the
post-trade/pre-settlement technology category is an active one.”
The key drivers to change are the
broker-dealer community, organizations like ISDA, DTCC Deriv/Serv, and the
regulatory agencies, as well as the largest traditional asset managers and
hedge funds. It is a collaborative effort that will take time but is
launched on the heels of success in credit derivatives.
“Importantly, the calls to automation
hold much promise to benefit the industry as a whole. Vendors will no
doubt help shape the future of the financial markets,” Habbal added.
The 32-page report contains 10 figures and
two tables. A table of
contents is available online.
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