Servicing derivatives positions: Challenges and best practices amid a convergence of market utilities

Abstract

Over-the-counter (OTC) derivatives have become a dominant force in the international securities market. Today, derivatives are considered to be a strategy of choice among institutional investors who increasingly value derivatives' versatility in meeting a broad range of needs and objectives. As a result of this expanding universe of investors, the volume of derivatives traded has risen steeply.This growth has brought with it new and urgent challenges that, if not addressed, threaten to cast a shadow across this critically important market. In an effort to meet these challenges, regulators and industry associations have formed working groups to identify ways in which to improve derivatives processing and enhance the efficiency of the market. The result is a series of steps that move in that direction, including cross-industry utilities to assist in introducing greater levels of reliability in processing and information.Yet, as new investors enter the market, they — and their asset managers — are encountering unique challenges in servicing derivatives-based investment strategies. The derivatives and asset servicing industries' ability to devise manageable solutions for these challenges will determine their success. New servicing solutions will also help shape the market itself, since growth in the derivatives market drives growth in the servicing industry.The time is right for taking a new approach to servicing OTC derivatives. Best practices will take into account what best serves mainstream investors and asset managers, addressing pain points and reducing operational risks. While the particular solutions that deliver these results may differ, successful solutions will adhere to four overall standards of customer service: reliability, flexibility, transparency and trained expertise.