Isda OTC derivatives operations benchmarking survey shows mixed results

The International Swaps and Derivatives Association’s latest over-the-counter derivatives operations benchmarking survey showed an increase in processing speed and automation for standardised products such as vanilla forward rate agreements (FRAs) and swaps, but less progress for more structured instruments such as credit and equity derivatives.

Isda’s third operations survey, conducted to provide firms with a benchmark for their data capture, confirmation and settlement procedures, polled 65 firms – an increase from the 61 in 2001. It is the first to include data relating to credit and equity derivatives processing.

The survey shows an increase in automation, most notable for FRAs and vanilla swaps. “The most common results are either no automation, or substantial automation, suggesting an ‘all or nothing’ approach: that is, once a firm institutes some automation, it applies it widely,” the survey’s authors said.

The responses indicated that front-office trade data errors, usually involving dates, are most common for credit derivatives. Twenty-one percent of these errors relate to credit derivatives, while 10% involve FRAs and 17% involve vanilla swaps.

The survey also reported that confirmation production has slowed for FRAs and for vanilla swaps. New and non-standard products, waiting time for documentation, and approval from legal and compliance areas are to blame, Isda said.

The survey participants reported an average of 803 new OTC trades per week during 2001, up from 689 in last year’s survey. But volumes at large firms decreased from 1,975 trades per week to 1,900; while volumes for small firms nearly tripled at 166 from 57 trades the previous year.

Most respondents expected volumes for products to remain stable or to increase by a maximum of 25% in the next year. The only exception is credit derivatives volumes, which most respondents expected to increase by more than 25%. Firms reported that signed master agreements were in place with more than 92% of counterparties, up from 85% last year.

The survey found that 100% of trade details for FRAs and 98% for vanilla interest rate and currency swaps were available for processing the same day, compared with 77% for credit derivatives and 83% for equity derivatives. In terms of trade confirmation, firms reported that over 90% of vanilla swaps and FRA confirmations were sent out within two days (T+2). But confirmations for credit and equity derivatives were generally slower, with only 48% of credit derivatives and 62% of equity derivatives confirmations being sent out by T+2.

FRAs and vanilla swaps showed a higher level of automation than credit and equity derivatives. Functions with the highest degree of automation included the transfer of front-office trade data to the operations system, the transfer of data from the operations systems to the general ledger and the addition of data to the front-office record. Of respondents that reported no current automation, 69% said they planned future automation for FRAs and 80% said they would automate credit derivatives.