Credit Trade Processing: More Bodies Needed?

Turmoil in the credit markets could inflate Wall Street's need for the staffers who prepare credit derivatives trades for confirmation.

Pushed by regulators to improve settlement procedures for credit default swaps and other credit derivatives contracts, investment banks upgraded clearing systems and say a high proportion of trades now clear electronically.

However, most CDS trades are still executed by phone. Before confirmation, trade details must be manually keyed-in, then manually checked to resolve any errors. So, operations staff in this area remain in demand - a demand heightened by the recent market volatility.

"The back-office systems of the world's largest investment banks are at breaking point from escalating trading volumes," Financial News reports. "Heavy trading volumes, particularly in credit derivatives and credit default swaps, have exposed weaknesses in the systems used by some investment banks for clearing these complex products, leading to backlogs of trades awaiting confirmation."

The newspaper says trading volumes on Friday, August 10, were so high that at least two top investment banks' credit derivatives teams had to work over the weekend to clear confirmations. A big U.S. bank reportedly built a week-long backlog of trades awaiting confirmation.

The problems may attract attention from bank regulators. Two years ago, regulators in the U.S. and U.K. demanded immediate action from dealers to reduce settlement backlogs for credit derivatives. Action was taken, but the process still requires manual input: Financial News cited a banker's estimate that 20 percent of electronic confirmations fail due to errors in entering trade data.

If banks come under renewed pressure to speed up processing, their quickest path to results may be simply to take on more bodies.