Derivatives: Filling the Automation Gaps

July 25, 2001 ( - While derivatives processing has made remarkable strides in automation, gaps remain that could increase costs or delay processing for institutional investors.

A new survey, conducted by the International Swaps and Derivatives Association (ISDA), confirms that longer established, higher-volume products, such as forward rate agreements (FRAs) are most likely to be automated. The survey also highlights some areas of potential shortfalls.

Going with the Flow

Results, based on responses from 61 firms globally, show the proportion of respondents that have automated at least 90% of the transfer of data from the front office to operations by product type, specifically

  • FRAs, automated by 78% of the sample,
  • vanilla interest rate and currency swaps, by 66%, and
  • non-vanilla swaps by 52%

Around 60% of the respondents have automated the trade-detail-transfer function for credit and equity derivatives to some extent, and levels of automation are set to grow in the coming year, according to the survey

Backed Up in the Back Office

For FRAs and vanilla swaps, trades are available for processing the same day and nearly 90% of trades reach the back office by close of business on trade date. At this stage, the following data usually has to be added:

  • counterparty details
  • basic trade details, and
  • Standard Settlement Instruction (SSI) data

Firms aim to dispatch all FRA confirmations within two days of trade, and 98% of vanilla swap confirmations within five days. They currently miss this target for 4% of FRA confirmations and 8% of vanilla swap confirmations, delays occurring primarily when the product is non-standard or when the back office is awaiting data or approval from traders or marketers.

Weighting responses by trading volumes, 34% of FRA confirmations are matched by a commercial auto-matching system, as against 9% of vanilla swaps.

FRAs are Faster

Across all respondents the time between a confirmation being sent and it being finalized is:

  • seven days for FRAs;
  • for vanilla swaps its 10 days, and
  • for non-vanilla swaps its 12

Firms distinguish between outstanding confirmations, depending on whether there is any proof of counterparty acceptance of the trade. In either case, the majority of confirmations have been finalized within 30 days.

The study, titled The ISDA 2001 Operations Benchmarking Survey: Over-the-counter Derivatives Operations Issues, aims to provide individual firms with a benchmark against which to measure the promptness and accuracy of their processing of trades, confirmation procedures and settlement.

The complete survey can be accessed from the ISDA’s Web site at .