OTC Derivative Processing

Market Survey of OTC Derivative Processing Services

As the debate over outsourcing in the City intensifies, Z/Yen have published a detailed report on OTC derivatives processing services.

The research involved discussions with over 100 City organisations, including 50 in-depth interviews with some of the biggest users of OTC derivatives. Z/Yen’s report highlights the confusion that exists over costs and systems in some of the best known institutions in the City.

Total annual OTC derivative processing costs range between $2.1 billion and $2.3 billion in the UK alone, of which between $346 million and $574 million are back office costs only (although there are difficulties apportioning technology costs and costs of errors). Z/Yen estimates that there will be a market for outsourcing OTC derivative processing of between $400 million and $600 million. This market is unlikely to emerge in the next 18 months, but could develop within 36 months. London remains the major global processing centre for OTC derivatives.

A surprising 83% of survey participants could not define their processing costs by either services or trade. Nonetheless the participants demanded that any potential outsourcing provider must be able to demonstrate future cost savings of more than 30%. Any firm wishing to provide OTC derivative processing services will have a great deal of work ahead helping clients understand their cost base before they can sell a credible service.

Research consultant Mary O’Callaghan says, "we were fascinated to discover how poorly some major organisations comprehend their own costs, in spite of the fact that the survey reveals that costs are a huge concern, indeed the biggest business issue that these organisations face today."

Z/Yen’s director Michael Mainelli adds, "finance houses may feel ‘there is a market for cost reduction, but not for me today!’ However the time is fast approaching when City institutions will have to count the costs of OTC derivative processing."