Financial firms should introduce automatic systems to
speed the processing of over-the-counter (OTC) derivatives
according to a new report.
The
Committee on Payment and Settlement Systems (CPSS) has issued a
report on new developments in clearing and settlement arrangements
for OTC derivatives.
The report analyses existing arrangements and risk management
practices in the broader OTC derivatives market and evaluates the
potential for risks to be mitigated by new systems.
The report focuses on the risks created by delays in documenting
and confirming transactions, the implications of the rapidly
expanding use of collateral to mitigate counterparty credit risks,
the potential for expanding the use of central counterparty (CCP)
clearing to reduce counterparty risks, and the risks associated
with unauthorised novations of contracts, among other areas.
The report said institutions need to reduce confirmation
backlogs with automated systems whenever possible.
To mitigate the risks of remaining backlogs, more systematic use
of economic affirmations is appropriate, said the report and, over
time, dealers should work towards daily portfolio reconciliations
with their most active counterparts.
Market participants should also identify steps to mitigate the
potential market impact of replacing contracts, following the
close-out of one or more major participants.
In addition, as the market infrastructure moves further in the
direction of centralised processing of trades and post-trade
events, several other issues will need to be addressed, said the
report.
The CPSS serves as a forum for central banks to monitor and
analyse developments in payment and settlement arrangements and to
consider related policy issues.
The full report can be viewed at:
http://www.bis.org/publ/cpss77.pdf
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