Study Reveals Massive Paper Backlog in OTC Derivatives Market

Automated customer communications is key, as human error can lead to huge monetary losses and litigation, TABB Group says.

Paper-based processes of contract negotiations and confirmations in the $400 trillion over-the-counter (OTC) derivatives market have created a huge backlog of trade confirmations, according to a study by TABB Group.

Since 2002, the estimated outstanding value of all OTC interest rate, currency, credit, and equity derivatives has grown nearly 30 percent a year, TABB Group said.

But as the OTC derivatives market expanded, the automation of customer communication management processes such as contract negotiations and confirmations has not kept pace.

From June to August 2007, the total number of backlogged confirmations jumped 250 percent, TABB Group revealed.

"In this world where hundreds of millions of dollars are invested in nonstandard products, human error can lead to huge monetary losses and litigation," said Kevin McPartland, TABB Group Senior Analyst.

"Automation of the customer communications process is a must-have for any business competing in this market, as the potential for loss could be devastating," he said.

The backlog of trade confirmations has resulted in poor transparency and left the financial services sector exposed to unnecessary risk. In many cases, confirmations were not only unsigned, but uncreated, the study revealed.