Confirmation keeps OTC trading costs high, survey finds

The growth of the exotic over-the-counter market and the increase in confirmation requirements mean that trading costs have stayed high, according to a survey conducted by the London-based market analysts Z/Yen.

Despite significant rises in volume, costs per trade have not fallen significantly. The average for credit derivatives trades rose from $218 to $221 over 2005; equity option trade costs fell from $152 to $135; and interest rate derivatives costs rose from $204 to $218.

Z/Yen's director of financial services, Jeremy Smith, said that the increases were the result of the growing popularity of exotic derivatives.

"Exotics tend to be two or three times as manually intensive as vanilla products," he said. "For an exotic interest rate derivative, 36% of the cost of the trade is the cost of confirmation; for a vanilla product it is 22% and for a forward rate agreement, 15%."

Increasing automation has brought down the cost of processing more standard products, but exotics still require manpower, he added. "For a vanilla product, you can match it by going through something like Swapswire. For an exotic, you have to match it yourself on a pen and paper basis... it costs so much because as a result you have a constant backlog and hordes of clerks trying to deal with it."

Staffing costs are likely to remain high: "Not many banks have moved processing outside London for derivatives, because it requires a degree of product knowledge. Eventually, standardisation and automation and the growth of utilities will cut costs – as will better netting."

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe

You are currently unable to copy this content. Please contact info@risk.net to find out more.

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here