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:
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