TowerGroup: OTC Derivatives Market Must Move Toward Electronification to Keep Regulators at Bay

NEEDHAM, Mass.--(BUSINESS WIRE)--The operational processes that support the both lucrative and risky asset class of OTC (over-the-counter) derivatives are opaque and inefficient – a situation unacceptable to both dealers and the Fed. New research from TowerGroup explores the pressure mounting on the industry to move toward electronification as trade volumes rapidly increase and as the benefits to investment managers, brokers, asset servicers, and industry utilities outweigh the challenges.

“Avoiding More Regulatory Oversight in OTC Derivatives: The Best Defense Is a Good Offense”

The depth of the problems and the possibility of increased regulatory oversight has brought the industry together to proactively improve standards, communications, and protocols. The Operations Management Group, consisting of 18 major financial institution stakeholders in OTC derivatives processing and industry groups, recently proposed self-imposed improvements to the processing of these complex instruments to the New York Federal Reserve Bank.

Participants in the OTC derivatives industry know that massive change is required to achieve true electronification. TowerGroup believes that in order to meet the pledged commitments outlined in the proposal, participants will need to further embed technology into the OTC derivatives process. A graphic demonstrating the immediate and future effects these commitments will have on the industry may be downloaded at: http://www.towergroup.com/research/content/page.jsp?pageId=3122

TowerGroup also finds that the thrust toward standardization will significantly improve the OTC process and that collaboration among industry participants is the winning approach. The key factors that will drive success are:

• Encouraging buy-side firms to connect to industry utility platforms
• Improving the standardization of OTC equity derivative contracts
• Aligning internal processes to take advantage of the offerings of industry utilities
• Investing in OTC derivatives processing platforms to track derivatives contracts, mitigate risk, and reduce cost of transacting in the OTC derivatives space
• Automating key aspects of the process to realize benefits to all stakeholders

The TowerGroup research report titled “Avoiding More Regulatory Oversight in OTC Derivatives: The Best Defense Is a Good Offense,” is authored by Stephen Bruel, an analyst in the Securities & Capital Markets practice at TowerGroup.

The report is available to qualified members of the press for review. To request a copy or to arrange an interview with Mr. Bruel, please contact Rachael Adler at +1.917.595.3038 or radler@cooperkatz.com.

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About TowerGroup: TowerGroup is the leading research and advisory services firm focused exclusively on the financial services industry. A respected source for trusted information and advice, TowerGroup brings many of the world’s leading financial institutions, technology companies, and professional services firms a deeper understanding of the business and technology issues impacting their organizations. Headquartered near Boston in Needham, Massachusetts, and with offices in North America and Europe, TowerGroup serves a global client base. Visit www.towergroup.com for more information.