'Don't forget the operations': Critical processes for OTC derivatives needing attention

Abstract

Over-the-counter (OTC) derivatives remain at a place in the automation cycle that cash equities were at in the 1980s. Their complexity has introduced the need for new kinds of risk and data management, and a host of new operational processes. While tackling it all at once is an overwhelming and daunting task, firms need to begin to break down key points and processes that will be the foundation for moving forward. Collateral management and portfolio reconciliation are two areas with which it would be wise to start. These processes underpin the ability of an organisation to identify errors, and thus control their data and manage their risks. They are shared processes — something that is not a competitive advantage, but a necessary control measure in which every market participant must engage. We have seen that even if one firm manages its risk well, the failure of a counterparty that is not doing so can have significant impact. Standardised, automated, transparent collateral management and reconciliation processes are critical to operations.