Swaps Processing: What's Automated; What's Not
Equity derivatives trailed interest rate and credit default swaps when it comes to post-trade automation, according to a study just released by the International Swaps and Derivatives Association.
ISDA's benchmarking study, conducted with the help of New York-based financial services consultancy Sapient, identifies trends in operations and provides firms with a barometer against which to measure just how well they are doing in trade capture all the way to confirmation and settlement. This year's analysis is particularly timely based on regulatory changes mandating automated trading and central clearing which will require firms to automate procedures previously conducted manually. The recent study was based on an analysis of 60 ISDA members--banks and broker-dealers-- of which 52 also participated in a previous survey.
Of the 52 firms, 20 were identified as small reflecting less than 500 swap trades processed a month. Sixteen were listed as medium reflecting between 500 and 3,000 swap trades processed on a monthly basis while 16 were large. They processed over 3,000 swap trades per month.
The trade group representing the $700 trillion over-the-counter derivatives market says that credit derivatives showed an average of 0.4 business days worth of aged -- or delayed confirmations -- a small drop from the 0.5 business days in the year-earlier survey. By contrast, the number of days for equity derivatives remained pretty high at 6.4 days instead of the 6.7 days in the previous survey. Interest rate derivatives showed the highest decline in aged confirmations -- 1.5 business days from 2.1 business days. However, when it came to tracking down the outstanding confirmations, two key reasons stood out for all of the types of swaps -- the number of business days outstanding was the most important one followed by unrecognized trades.
The backlog of confirmed transactions appears to track whether or not the trades which can be electronically confirmed are. In the case of credit rate derivatives it comes close to a perfect score of about 100 percent. Credit derivatives also had a pretty good showing at about 80 percent. Equity derivatives faltered at less than 40 percent.
The use of automated procedures will clearly ensure confirmations are done far more quickly. Interest rate and credit derivatives boost close to a 90 percent rate of confirmation on the day the trade is executed or two days later in a worse case scenario. Only fifty percent of equity derivatives are confirmed on the same day with six days to ten days later being the norm.
When it comes to monthly payments, interest rate swaps lead the pack with 65 percent conducted on a straight through processing basis -- without any manual intervention. Credit derivatives weighed in second at 62 percent while equity derivatives lagged at 40 percent. Smaller firms seemed to do the best when it came to equity derivatives with a 60 percent STP rate compared to only 27 percent for large firms and 23 percent for medium-sized firms.
Among other ISDA findings: credit derivatives led the pack in most other categories of post-trade processing functions with 87 percent of confirmations fully automated; 78 percent of nostro breaks reconciled in an automated fashion and 53 percent of trades pre-matched electronically before settlement. For interest rate swaps, 61 percent of confirmations are done in a completed automated fashion while 65 percent of nostro breaks were and 19 percent of settlement trades were pre-matched before settlement. Equity derivatives fared better than interest rate when it came to automated pre-matching at a 23 percent rate. Sixty four percent of nostro breaks were reconciled in an automated way but only 36 percent of trades were confirmed in a completely automated fashion.
Automating the process of reconciling nostro breaks goes a long way to reducing the times it takes to correct discrepancies. In the case of interest rate swaps, 9 percent of nostro breaks were fixed in one day while 21 percent in two days and 55 percent within 3 days to five days. For equity derivatives, 38 percent of problems are fixed within 3 days to 5 days while 35 percent are fixed in two days. Only 10 percent are fixed in one day. By contrast, 18 percent of credit derivative trades can be fixed within one day and 25 percent within two days.
Written by Chris Kentouris, Editor-in-chief (Chris can be contacted through Chris.Kentouris@hotmail.com)