Rapid growth in the global over-the-counter (OTC) equity derivatives market is being constrained by absence of adequate infrastructure and automation, says a report by Aite Group.
The report, “Trends in OTC Equity Derivatives,” says that the extended length of time required to confirm OTC equity derivatives transactions is causing concerns among market participants and regulators in many countries. Many of the delays, which can last for weeks and even months, largely stem from the very complex legal documentation required, according to the report.
The Aite Group study is one of the first to analyse trends shaping the OTC equity derivatives market and the challenges it faces in bringing greater efficiency to the market place.
“The primary barriers we observed to increasing automation in the market place are the complexities that arise between trading firms in the legal documentation of OTC equity derivatives transactions,” says Brad Bailey, a senior analyst at Aite Group. “Understanding these complexities and identifying ways to simplify the execution of Master Confirmation Agreements (MCAs) between market participants would be an important first step to ease the processing issues in these products.”
“Because equity derivatives are a complex market, the documentation requires a great deal of attention,” adds Gina Ghent, a vice president of business development at DTCC. “DTCC is working closely with market participants to facilitate the signing of MCAs between market participants as a way to help bring these firms into our automated environment. We have the capability to automate the broad and dynamic range of equity derivatives products, but without accelerating the pace of MCA execution, market automation will not occur as rapidly as it should.”