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Hedge funds must address OTC volume surge

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Trading in OTC derivatives has grown dramatically in the last few years and firms have faced a number of challenges in processing and settling these trades in a timely way.

Trading in OTC derivatives has grown dramatically in the last few years and firms have faced a number of challenges in processing and settling these trades in a timely way. OTC derivatives are important risk management tools. For hedge funds, OTC derivatives have become an extremely popular investment with deep pools of liquidity making it an absolute must for them to enter into this market.
 
As in many fast growing markets, there are concerns about the ability of the market’s infrastructure to accommodate its growth effectively. Are hedge funds capable of handling the volume of activity in a manner that does not create undue risk especially in a meltdown environment? Frank De Maria, Managing Director of Business Development at The Depository Trust & Clearing Corporation (DTCC), says that a primary issue in OTC derivatives processing is a relatively young infrastructure, which is having a direct impact on operational efficiency and the industry’s reputation. ‘In an environment where OTC derivative trading is growing in popularity, market participants are focused on harnessing appropriate industry infrastructure to gain efficiency in this area. Similar to how the cash markets adopted to its growing volumes nearly 30 years ago, the OTC derivatives market is continuing to evolve,’ he affirms.
 
DTCC Deriv/SERV’s Trade Information Warehouse, a comprehensive electronic platform for servicing derivatives contracts from confirmation through to final settlement, provides a viable automated solution to both buy- and sell-side participants. The Warehouse provides for a centralised global repository where all trade records are kept and allows for centralised settlement of payments between credit derivatives trade counterparties. As each OTC transaction is unique, this is an important development, because until now there has not been a single place where a net position for OTC derivatives transactions has been maintained.
 
‘The Warehouse also provides opportunities for future functionalities,’ adds De Maria. ‘For example, it is possible to take the data that the Warehouse has stored over time and use it to provide valuation services. All hedge funds are looking to improve their daily processing capabilities in this area and the DTCC platform creates efficiency, reduces risk and lowers cost.’
 
 
DTCC Deriv/SERV has the largest community of users for automated post-trade processing services with a customer base of over 1050 global derivatives dealers and buy-side firms in 31 countries. De Maria explains, ‘The DTCC Deriv/SERV platform is designed to provide appropriate infrastructure and a full range of services. All major global derivatives dealers use this platform to process OTC derivatives products, and our matching and confirmation service enables market participants to manage their OTC credit, equity and interest rate derivatives instruments on a single platform. The service is also free for buy-side firms.’
 
 
A recent report by Celent states that global technology spending on OTC derivatives processing will increase from USD187.8 million to USD232.5 million by 2011. But, it adds, the buy side is not as actively involved in these automation efforts as is needed, as they look for technology that effectively meets their needs. That may come in an all-purpose platform that helps sustain industry growth and also provides an essential structure for managing the volume surge during turbulence. Are the hedge fund managers listening?
 

An interview with Frank De Maria, Managing Director of Business Development at The Depository Trust & Clearing Corporation (DTCC)

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