CPSS: OTC settlements good, but still room for improvement

Systems for the clearing and settlement of over-the-counter (OTC) derivatives trades have strengthened over the past few years, but further progress is needed to reduce risk, according to a Committee on Payment and Settlement Systems (CPSS) report issued last week.

The report recommended greater use of automated systems to reduce confirmation backlogs in all OTC derivatives classes, pointing out that this had worked well in the credit derivatives market. For the remaining backlogs, it suggested dealers mitigate the risk by moving towards daily portfolio reconciliations with their most active counterparties. The committee also thought dealers should find ways of reducing potential market impact of replacing contracts following the closeout of a major participant.

To ensure a smooth transition into more centralised trade and post-trade event processing, the committee recommended more open access to post-trade services and greater connectivity between systems. It also raised the question of extending standards for securities settlement and payment systems to OTC derivatives clearing and settlement service providers.

The Bank for International Settlements-hosted committee periodically produces reports on settlement arrangements through working groups of central bank representatives and derivatives supervisors.