Stifle that yawn

20 April 2007

Today s top traders were still learning to count when backoffice snafus brought down brokers like Hayden Stone and Loeb Rhoades. Those firms were swamped by unmatched trades when markets turned sharply. Despite progress, today s derivatives shops run a similar risk.

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John Tiner, the chief executive of the Financial Services Authority, warned that derivatives markets have grown so quickly that dealers' normal level of business absorbs nearly all their backoffice resources, leaving them with little spare capacity to handle spikes in volumes that could accompany market crises.

Speaking at the International Swaps and Derivatives Association's annual general meeting on April 18, Tiner said that dealers have made strides in reducing the number of unconfirmed trades in their credit derivatives market. But he said other products – especially equity derivatives – suffered significant backlogs. And, while all major dealers met a January deadline to reduce the volume of trades that remained unconfirmed after 30 days by 25%, the numbers subsequently slipped.

These backlogs will not be as easy to reduce as similar problems with credit derivatives, which dropped dramatically last year after jawboning from market watchdogs and new documents from Isda, because the firms that trade equity derivatives are often smaller and the products more complex.

Isda released a market survey showing that average outstanding confirmations in the credit derivatives markets fell from 16.2 days worth of business last year to 5.5 days now. For equity derivatives, that has fallen from about 50 days to 21 days worth of business.

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