Back Offices Buckle as Trading Surges

Discussion in 'Wall St. News' started by archon, Aug 24, 2007.

  1. archon

    archon

    http://www.financialnews-us.com/?page=ushome&contentid=2448586302

    Back offices buckle as trading surges Luke Jeffs
    23 Aug 2007

    The back-office systems of the world’s largest investment banks are at breaking point from escalating trading volumes. 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.

    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. One banker said it was lucky the spike happened on a Friday, giving his team two days to catch up, or they would not have been able to open for business on Monday.

    A European bank said August 10 was its busiest trading day to date, when it traded 20% more in volume than it thought its systems could cope with. A big US bank is understood to have fallen one week behind with its confirmations.

    The problems come two years after the US Federal Reserve and UK’s Financial Services Authority called together 14 top dealers, demanding immediate action to address the growing backlog of credit default swaps.

    The Fed and FSA ordered the banks to reduce the backlog by 70% within a year, a target exceeded in the case of CDSs, where the banks cut it by 85%.

    One provider of derivatives technology said: “Electronic confirmation rates are higher than they used to be but what the banks aren’t saying is how much manual work goes on behind the scenes getting the trades ready for matching.”

    He added: “Electronic confirmation rates may be 80% to 90% but how long after trade execution is that happening? If it’s a week or more, the risk is great, whether the trade is being confirmed electronically or otherwise.”

    Most CDS trades are executed over the phone between dealers and their brokers, meaning trade data has to be manually keyed into banks’ internal systems, leading to errors.

    One banker estimated that 20% of electronic confirmations fail because the trade data has not been entered correctly.

    The problem is compounded by the dealing room culture, which regards data entry and operational efficiency as a back-office problem, he said.