Major traders of over-the-counter derivatives have pledged to improve operational efficiency for interest rates and commodity derivatives, and to improve processing speeds for credit and equity derivatives.
As part of the long-term goal of processing OTC derivatives on the date of trade, the Operations Management Group (OMG) - an industry body comprising 17 major dealers, several buy-side firms and three associations - committed to its latest set of targets in a letter to the Federal Reserve Bank of New York on July 31. These included improving rates for electronic matching and submission of trades and reducing outstanding trade confirmations.
Many of these build upon the previous set of targets outlined in a letter to the New York Fed on March 27 (Risk June 2008, pages 26-28). This letter also included commitments to switch to electronic novation platforms from email systems by the end of the year, and to incorporate the auction process for cash settlement of credit derivatives into the International Swaps and Derivatives Association's standard documentation.
"These improvements are important to strengthen the resiliency of the financial system," says Timothy Geithner, president of the New York Fed.
The OMG has pledged to process 65% of electronically confirmable interest rate derivatives on electronic confirmation platforms by the end of October, increasing to 75% by the end of January 2009. By September 30, it will ensure outstanding confirmations aged more than 30 days will not exceed two business days of trading volume (based on average daily volume in April, May and June 2008).
For commodities, dealers and buy-side firms promise to develop a strategy for increasing counterparty matching rates, as well as to improve the frequency of trade volume metrics reported from quarterly to monthly.
The major dealers have also committed to higher targets for credit and equity derivatives. By the end of the year, the OMG plans to improve submission of credit default swap trades to the Depository Trust and Clearing Corporation (DTCC) within one day of the trade date to 92%, improve matching at the DTCC without modification to 92% and increase matching at the DTCC within five days of trade to 95%.
For equity derivatives, the goal is for 75% of electronically confirmable trades to be processed through electronic platforms by the end of January 2009.