Regulator Turns Up the Heat on Derivatives Markets

By Cory Levine, Wall Street & Technology

The much-discussed global derivatives market had the spotlight turned its way this week by an official from the U.K.'s Financial Services Authority (FSA). In a speech at yesterday's International Swaps and Derivatives Association regional conference, Thomas Huertas, director of the Wholesale Firms division and banking sector leader at the FSA called out the continued inefficiencies, risks and "sheer sloppiness" within derivatives markets.While Huertas commended the industry, which has recently "attacked the legacy, with teams of operations experts pouring over old documentation and, in many cases, locking themselves in a room ... to confirm outstanding trades," he also called attention to work that has yet to be done.

With nearly 20,000 trades that remain unconfirmed thirty days or more after the trade day, according to Huertas, working through the backlog of unconfirmed transactions must be a priority. Further, care must be taken to ensure that new operational deficiencies do not develop, and that industry participants cooperate to create a robust industry backbone.

Although progress has been made, it appears to be slowing, and regulators are not afraid to impose penalties on firms that aren't proactive. "The July data from the industry on matching and confirmations were not promising," said Huertas. "The trick is getting the job done, day in and day out, and firms should expect regulators to focus on whether firms are, in fact, achieving their targets on an ongoing basis. And they should not be surprised if regulators weigh action against firms that do no achieve these targets."

Underscoring the industry movement to improve the underlying technology of the derivatives markets, TowerGroup released a report this week predicting an annual increase of 18 percent in global IT spending in derivatives over the next three years. The key spends will be on risk management, processing, and pricing and analytics. Also, credit derivative affirmation and connectivity provider T-Zero announced that more than 100 buy-side firms had signed on to its services, reflecting an unexpected rapid growth of the platform, which is just over a year old.