08 September 2014

Tabb Forum: Timely confirmations in OTC derivatives: A Herculean task?

The US and Europe are responsible for nearly all outstanding open positions in OTC derivatives worldwide. Why is compliance with confirmation mandates so onerous, and how can the industry move toward more timely confirmations?

There are various contributory factors for confirmations not being able to be executed in a ‘timely’ manner. Standardisation of templates is still a far cry, and this is where the compliance rates are woefully low. There is no market-wide master agreement in place for these products. This imposes a limitation in terms of widening the MCA coverage, as the industry has to  depend solely on paper confirmations. At least for complex and bespoke paper trades, it is important to pre-agree on the  terms to facilitate “dispatch” of confirmation on T+0. The industry is taking steps to fast track the execution of ISDA-published MCAs, while there should also be a constant endeavour to standardise more and more products. There are also certain operational bottlenecks that cannot be underestimated.

For confirmations to be executed in a ‘timely’ manner, in the strictest sense, there is need for a coordinated and concerted effort across the industry in specific target areas – be it in improving front-office discipline to reduce amends and late booking, pushing ‘existing’ clients to move to electronic platforms for applicable products while considering no ‘new’ paper-based clients, pre-agreeing the confirmation terms to facilitate early dispatch, etc., and not to forget conducting extensive client awareness sessions.

The sell side is rising up to the challenge by following a two-pronged approach. One which is short-term by adding additional head count to ensure confirmations are dispatched on T+0 and returned by T+1. The other, which is strategic and longer term, is significant investment in template standardisation across the industry, as well as technological solutions, in order to reduce the reliance on extra manpower.

The buy side, on the other hand, is at the receiving end due to pressure to utilise electronic matching platforms for eligible trades. There is also pressure on them to execute confirmations once the transaction has been completed. This means buy-side firms are enhancing their business processes and augmenting their resource count to meet this new demand.

 

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