Managing Risk Key for OTC Derivatives

Risk management and post-trade administration is critical for the growing over-the-counter derivatives market, according to State Street Corporation, which in August launched an OTC derivatives servicing platform.

“It is crucial that the sellside community, the financial services industry and regulators work together to develop new approaches to processing and servicing these complex transactions,” said Jay Hooley, president and chief operating officer of State Street.

The world's largest money manager for institutions on Monday released its sixth in a series of Vision Reports. The latest report on derivatives servicing says volume of OTC trades may present a challenge for legacy technology systems, which were originally designed to process traditional equity and fixed-rate transactions, but are now handling non-traditional trades as well.

A January study by Calypso Technology, a global provider of an integrated trading application suite to the capital markets industry, found that 61 percent of respondents were concerned about improving their internal systems for risk management, and 49 percent were working to improve OTC derivatives processing.

Last month, the U.S. House Agriculture Committee introduced the Derivatives Markets Transparency and Accountability Act of 2009, which would require that virtually all OTC derivatives be either be settled and cleared through a derivatives clearing organization (DCO) regulated by the Commodity Futures Trading Commission, a clearing organization regulated by the Securities Exchange Commission, a regulated foreign clearing organization, or reported to the CFTC.

Neil Wright, senior vice president and product manager for derivatives servicing at State Street, said: “With increasing volumes and complexity, the range of procedures to confirm, process and otherwise manage the trade life-cycle of OTC derivatives needs to be automated. In addition, providers will need to keep pace with the increasingly sophisticated analytics needed for derivatives trades.”

State Street OTC Hub is currently in production with PIMCO, the world's largest manager of bond funds and long-time State Street customer.

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