Uncleared OTC derivatives pose a significant risk to capital markets, as they can result in substantial financial losses due to fraud, operational errors, and non-compliance with regulations. But which asset classes are we talking about here?
Our research on Investment Banks reveals that most types of asset classes are impacted, but for different reasons:
- Equity and Commodities derivatives are highly complex and have a low level of standardization, making them challenging to process efficiently.
- Rates & FX derivatives are traded in high volumes, with many small counterparties who are below the mandatory clearing threshold and do not utilize current matching platforms. In addition, the matching of events, such as cash-flows, remains largely manual.
You will find below details of our research, for Equity and Rates derivatives:
| Equity derivatives | Rates derivatives | |
|---|---|---|
| Volume (number of trades) | Medium | High |
| Proportion of paper trades | High | Low |
| Counterparties of paper trades | Mostly sell-sides (dealers) to sell-sides | Mostly sell-sides to buy-sides, also intra-group trades |
| Examples of paper trades | • Basket-underlier swaps & options, Portfolio swaps • Structured equity derivatives (autocall, leverage …) • Strategies (3+ legs) | • Bermuda swaptions • Structured rates derivatives • Sustainability-linked swaps • Strategies (3+ legs) |
| Examples of manual events | • New trades • Cash-flows (equity amounts) • Basket rebalancing / substitution | • New trades • Cash-flows (rates amounts) |
Fragmos Chain has developed a platform to automate post-trade processes for all kinds of asset classes and products. Our matching algorithm creates a shared and legally validated description of derivatives trades and events, resulting in a more accurate, efficient, and secure trade process.
