OTC Derivatives Processing special report

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This Challenge Is Not Trivial

The rise in popularity of exchange-traded and over-the-counter (OTC) derivatives from a buy-side perspective is not a new phenomenon, but it is a growing one. Asset managers are yielding in ever greater numbers to the market's push and pull factors-the push away from traditional asset classes such as equities due to ever-shrinking margins, and the pull from the derivatives market, offering participants greater potential for alpha, although this market is not without its risks-making this one of the fastest-growing business segments in the financial services industry.

But the derivatives market, especially when it comes to OTC instruments, does present its fair share of challenges, chief among which are the dual-pronged issues of technology and operations that need to be satisfactorily addressed before firms can claim to have the wherewithal to systematically and efficiently manage such variables as counterparty credit risk, margin calls, collateral, the affirmation and confirmation processes, and clearing and settlement.

But let's be clear here: Developing an internal and external infrastructure connecting all the necessary links in the front-to-back-office chain is anything but a trivial exercise.

In this special report, covering just about every aspect of exchange-traded and OTC derivatives trading and processing-from haircuts to holistic risk views and SEFs to straight-through processing-our six sources discuss the crucial role that technology plays in supporting this complex industry, the need for market participants to finally get moving in terms of adopting standards to help the automation of such business processes, and the fact that much of this back-office game is in its infancy, and is therefore yet to be played out.

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