Confirmation keeps OTC trading costs high, survey finds

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."