Top tier credit derivatives houses are spending an average of USD27 million annually on technology and it still doesn't work, according to a research report by Markit and Reoch Consulting.
Even with the colossal sums of money being thrown at operations, over 25% of plain-vanilla credit derivatives trades have to be amended. A whopping 40% of errors result in a new confirmation, according to Jonathan Davies, coo of Reoch Consulting.
Not surprisingly for an operations survey consisting of 500 questions, it produced nearly as many statistics as there are credit derivatives trades. Davies pointed to only 33% of traders inputting the trade details directly and a mere 17% of the technology budget being spent on systems to capture trades from the counterparty as being two of the most important stats highlighting why there are so many incorrect confirmations.
Electronic trading in itself is not the panacea banks are searching for, but it would likely force derivatives houses to standardize terms and input trades directly, therefore eliminating many of the problems, Davis said.
Davies pointed out, however, that derivatives shops cannot act alone. "You are only as good as your counterparty," he noted, explaining that if one bank checks all its trades instantly, but its counterparty does not process the trades for several days the best-practice institution has to just sit and wait. This results in the banks with the most end user business suffering the largest operation woes. They do, however, make up for this with larger bid/offer spreads than are available in the interdealer market.
