Survey of the OTC Derivatives Market in Australia – May 2009 Box 2: International developments in post-trade processing

Trade and post-trade practices in the OTC derivatives market have evolved considerably over time, with transactions increasingly executed and confirmed electronically. These trends have been encouraged by international regulators, and industry bodies.

In particular, with strong growth in volumes across products, capacity constraints began to emerge in post-trade processing. This attracted the attention of regulators and, in September 2005, the Federal Reserve Bank of New York convened a group of the largest international dealers in the credit derivatives market and their regulators, seeking commitments to enhance post-trade processing arrangements. This group played an important role in encouraging automation in confirmations processing and the launch of DTCC's Trade Information Warehouse for credit derivatives trades. To underpin further enhancements in this area, the industry formed an Operations Management Group, which in October 2008 committed to a series of targets to ‘further strengthen the operational infrastructure for OTC derivatives’.^[1] This included a commitment to lift the rate of electronic confirmation of interest rate and equity derivatives globally.

ISDA's 2009 Operations Benchmarking Survey illustrates the relative efficiency of electronic processing of confirmations. This survey reveals that the volume of outstanding confirmations is typically considerably higher in products such as equity derivatives, where the level of automation is currently relatively low globally, than in products such as credit derivatives, where more than 90 per cent of trades globally are confirmed electronically.^[2]

The industry also committed to increasing the use of portfolio reconciliation and portfolio compression tools. Both practices have been encouraged by regulators internationally, with the benefits cast in terms of streamlining portfolios, eliminating operational and counterparty risk on economically redundant trades, and ensuring an accurate feed of information to risk-management systems.

Also in response to pressure from the Federal Reserve Bank of New York, among others, the industry committed to the development of central counterparty clearing in the credit derivatives market. Central counterparty clearing has developed independently for some vanilla trades in a range of products, most notably in the interest rate swaps market (via SwapClear), but regulators internationally have strongly promoted the expansion of the model. Two new central counterparty services for credit default swaps (initially indices) are operational at the time of writing. Between its launch in March 2009 and mid-May, one of these, ICE Trust, cleared almost 6,600 transactions with a notional value of USD 586 billion.

Footnotes

See Federal Reserve Bank of New York: <http://www.newyorkfed.org/newsevents/news/markets/2008/an081031.html> [1]

See ISDA Operations Benchmarking Survey, 2009:
<http://www.isda.org/c_and_a/pdf/ISDA-Operations-Survey-2009.pdf> [2]