Operational risk relates to losses resulting from inadequate or failed internal processes or external events. It has come into greater focus in the last four to five years among OTC derivatives market participants, particularly in the wake of the financial crisis.

In a new report, Operational Risk Management in OTC Derivatives in Asia, Celent looks at issues Asian markets have had with operational risk. The markets have been making efforts to reduce operational risk, and this practice has generated legal documentation that ensures standard procedures are available for executing transactions. Due to improvements in both technology and regulation, market participants have gradually moved to electronic trade processing. These efforts are likely to be boosted by mandatory use of data repositories and widening use of central clearing.

“Operational risk management has become much more important in the last few years,” says Anshuman Jaswal, Celent Senior Analyst and author of the report. “Attempts by regulators to improve transparency and reduce operational risk will bear fruit only if OTC derivatives market participants have the necessary reporting mechanisms in place. If that occurs, information sharing will become a vital element in their processes.”

This report considers the volumes of OTC derivatives traded on a global basis, as well as the operational performance of the market participants. The report then looks at the various factors and drivers that lead to operational risk and the use of capital requirements to mitigate this risk. The Basel II and III frameworks for operational risk management provide insights on how banks manage this risk. The report concludes with best practices to ensure firms minimize the levels of OTC derivatives operational risk in their organizations.