New Credit Derivatives Report Tracks Trends, Technologies and Costs
The processing cost per trade for a credit default swap (CDS) is projected to drop to $190 by 2008 versus $420 in 2006, a 55% decline, "and additional automation will continue to aid in lowering costs."
This is according to a report titled "Shaking Up the Credit Derivatives Market: Profiling the Electronic Trading Platforms & Top Post-Trade Vendors," published in July by the Aite Group, a research and advisory firm focused on the financial services industry.
Aite also anticipates that, despite sharply rising volumes, the industry’s aggregate CDS processing expenditures globally will peak in 2006 at about $690 million and then begin to trend downward, falling to $620 million in 2008.
Thanks to...
Technology is the reason for the dramatic turnaround in costs. "Increased investment in technology infrastructure, as well as ROI from technology investments, will reduce the trade capture, affirmation, confirmation, matching and settlement costs for CDSs over the next two years," states the 50-page report.
Brad Bailey, senior analyst, Aite Group
While Aite projects that overall IT expenditures will continue increasing through 2008, the rate of growth in investment will slow significantly. For instance, the industry’s costs in 2006 are expected to rise 45% over 2005, reaching $490 million, while 2008 costs are projected to grow 15% over 2007, to $720 million.
More on expenditures
"The speed at which the credit deriv-atives market has grown has astonished many," said Brad Bailey, senior analyst at Aite Group and the report's author. "Trading has grown so quickly it’s put extraordinary pressure on firms to keep up with the pace. Both buy- and sell-side firms have increased their operations and technology spending significantly."
And exactly how are the resources being allocated? "The essential areas where increased electronic trading and automated processing is taking place is broadly divided into three areas: the electronic point of trade; the electronic representation of documentation and providers of workflow handlers; and affirmation, confirmation, matching and settlement functions," states Aite.
Aite On Deriv/SERV
"The de-facto matching service in the credit derivative world is DTCC's Deriv/SERV," states the Aite Group in its new report, titled "Shaking Up the Credit Derivatives Market: Profiling the Electronic Trading Platforms & Top Post-Trade Vendors." DTCC features prominently in the report's section on post-trade processing.
The Aite write-up includes a succinct overview of Deriv/SERV and its connectivity options. "Deriv/SERV is quickly evolving," the report states. "It has met the challenges faced by the industry and has been aggressive in offering solutions." The report also covers new developments, such as AffirmXpress and the Trade Information Warehouse.
"Vendors have built much of their value proposition around the evolution and success of DTCC Deriv/SERV," says Aite. "As a result, many vendors are leveraging this effort and building solutions around connecting dealers and buy-side firms to the DTCC."
The report also notes that benefits of these outlays will go beyond cost reduction. "The increased use of electronic messaging, automated confirmation generation, affirmation at the point-of-trade and electronic matching will be large factors in not only lowering processing costs but minimizing operational risks and lowering costly and time-consuming errors."
Who are the players?
In addition to analyzing processing and IT expenditures, Aite provides an overview of the major service providers and technologies for the electronic trading and automated processing of credit derivatives. The study includes brief descriptions of a handful of companies "with interesting offerings in the space, as well as several offerings that are scheduled to come to market before the end of the year."
The report concludes with a look ahead at the world of credit derivatives. Changes that the Aite Group anticipates in the coming 12 months include "significant consolidation in this space in the form of acquisition, strategic partnerships and mergers."
Aite also expects, "The growth in the prime brokerage of OTC derivative products and credit intermediation will drive prime brokers to offer solutions that ease workflow, build connectivity to electronic matching engines, and mitigate operational risk for their hedge fund client base." @
[To learn more about the Aite report, contact Frank Rizza at 617.338.6021. For more information on Aite, visit www.aitegroup.com.]