CHALLENGE: As OTC derivatives grow increasingly popular, accurate pricing and risk evaluation is more important than ever. Automating derivatives processing also will be a priority in 2008 -- not just for efficiency's sake, but also to help firms mitigate market volatility.
One of the biggest originators, Merrill Lynch, took a huge writeoff for its losses and ousted its CEO. "This summer certainly highlighted ... the complexity of dealing with products that are hard to value," Bailey notes. The need has never been greater for buy- and sell-side firms to invest in technology to keep their derivatives involvement as immune to market volatility as possible. Implementing analytics software that can help with better pricing and risk evaluation, and accurate and timely trade capture and processing, will be top priorities in 2008.
Where the Industry Is Now: As a result of the CDO fiasco, some of the work that had been going on to automate derivatives processing (particularly the DTCC's Deriv/Serv and Trade Information Warehouse for processing and storing derivatives contracts) suffered a setback, and attention shifted toward technology that helps price derivatives, assess their risk and capture trade details. At the SIBOS conference in October, delegates discussed the need to get to T+30 -- the ability to process derivatives within 30 days. "The OTC market has evolved in a very inefficient way, and we're trying to automate big parts of it," Bailey says.
Focus in 2008: Broker-dealers will continue to urge clients to use Deriv/SERV. However, some dealers still need to make sure their software can read and produce Financial products Markup Language (FpML) so that it speaks what is becoming the common language of derivatives. Buy-side firms will upgrade their technology, especially those that plan to invest more heavily in derivatives. Some will turn to outsourcing or hosted solutions so that they don't have to build in-house.
Industry Leaders: The so-called "Fed 14" -- the 14 broker-dealers that promised the Federal Reserve in 2005 they would remedy their derivatives processing backlogs of up to 90 days -- are probably the furthest along in derivatives automation.
Technology Providers: DTCC, SwapsWire, T-Zero, CreditMatch, Markit and Thomson Tradeweb all have been evolving their derivatives technology offerings. Several vendors, some new to the space, introduced derivatives processing offerings at SIBOS in October: Content management system vendor Interwoven launched DealConnect for DTCC, which lets buy-side firms and broker-dealers connect with the DTCC's Deriv/SERV Trade Information Warehouse; Wall Street Systems unveiled a hosted back-office clearing and settlement system; Document Sciences and Volante Technologies announced a partnership to automate the production and transmission of trade confirmations over a range of messaging systems; and Message Automation and City Networks launched Proactive Derivatives, a solution for automating post-trade management of OTC derivatives.
Software that enables model-based pricing, from vendors such as Numerix, Quantifi and Maplesoft, will be big this year as firms strive to bring more intelligence to their derivatives investments. Software that helps match documents between counterparties and handle the workflow of derivatives, such as Document Sciences' offering, also will be considered.
Price Tag: According to Bailey, dealers spent $610 million on IT just for credit derivatives in 2007. "There have been a lot of setbacks, but I see sell-side firms spending around $740 million on credit derivatives technology next year," he predicts.
Source URL: http://www.wallstreetandtech.com/showArticle.jhtml?articleID=204203549Publish Date: November 26, 2007
