The Emerging OTC Market Infrastructure From Execution To Settlement

Since the emergence of trading in OTC derivative products, the infrastruc- ture to support the market has moved towards greater automation and reduced cost. Progress was steady in the 1990s. However, in the early 2000s, CDS enjoyed a significant increase in secondary trading, causing a paperwork crisis. As discussed in section 1.3.5, this was mainly due to the manual approach used for completing assignments and novations. CDS automation had not kept pace with the growth of the market. The FED engaged with the largest banks, encouraging them to make material improvements to their back-office processing. A number of ‘FED letters’ defined a series of quantified targets for banks to reduce outstanding confirmations, and improve processing in most back-office areas. This substantially improved OTC derivatives market processing, leaving us with today’s bilateral market381.