With regulations transforming OTC derivatives, operations teams are looking for ways to automate the derivatives lifecycle in order to reduce processing time and dependency on manual systems and spreadsheets, as well as provide transparency into audit trails and ensure accurate reporting to management.

“The workarounds in the OTC space stem from the traditional highly bespoke and customized nature of the trades,” said Björn Schumburg, senior business consultant at SimCorp.

These include custom bilateral confirmations, often processed as emails, PDF attachments or faxes require manual interaction. Such media don’t lend themselves to a high degree of automation.

“Compared to other asset classes, the technology solutions in the OTC trade processing space have been lagging behind,” said Schumburg. “With the latest regulation driven trend of standardization and advancements in electronic trading, we have entered a new era.”

According to a recent poll by SimCorp of over 150 executives from capital market firms mainly in North America, 74% consider STP to be extremely important when it comes to derivatives processing.

However, 79% still rely heavily on spreadsheets and manual processes when processing derivatives, while 84% need to create workarounds to support derivatives in their current middle and back office operations, and 82% require at least two months to model and launch new derivatives products and sometimes significantly more utilizing their current systems.

The good news is that with newer means of electronic trade capture, confirmation and matching, firms can achieve a greater degree of automation.

“Once the trade is on the books, affirmation, confirmation, clearing and settlement processes can be seamlessly tracked,” Schumburg said. “Reconciliation, collateral, margining, netting and compression processes complete the trade management tasks. This creates greater transparency throughout the whole investment organization. This efficiency is required as asset managers increase their derivatives exposure.”

Schumburg refers to this as ‘alpha-tizing’ the infrastructure. “Alpha-tizing the infrastructure means decommissioning ad hoc workflows and disparate data silos that have proven to have a negative impact on the retention of alpha,” he said.

According to a study by Chito Jovellanos, president and CEO of research firm forward look, Inc., improved operating quality helps enable portfolio returns, generating material gains in portfolio performance ranging from 51-242 basis points.

“One key driver of these efficiency gains is data operability, meaning information being passed seamlessly and easily between the investment managers’ different business units,” he said.