Bank of England says back office delays still a risk

Delays in trade confirmations are still a problem in credit derivatives trading and expose the industry to unnecessary risk, according to a report by the Bank of England.

Its latest Financial Stability Review, published on June 27, said growth in credit derivatives trading was continuing to accelerate, and warned: "Confirmation backlogs potentially leave firms vulnerable if they cannot ascertain the size and nature of their exposures when a credit event occurs. According to market contacts, the problem is exacerbated by some hedge funds assigning trades to third parties without informing the original dealer." This could make risk management difficult under stress conditions, the report added.

The report also highlighted shortcomings in pricing models, which failed to take implied correlation into account, and added that VAR failed to capture model risk, liquidity risk and basis risks. It said stress tests were also unreliable if based on historical events rather than hypothetical scenarios.

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