Credit Derivatives Backlogs Must Be Alleviated, BearingPoint Report Warns

BearingPoint, Inc., issued a report addressing the dangers of credit derivatives backlogs and urges policy makers to do something before it damages the financial market. Credit derivatives are financial contracts that allow market participants to assume either a positive or

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BearingPoint, Inc., issued a report addressing the dangers of credit derivatives backlogs and urges policy makers to do something before it damages the financial market.

Credit derivatives are financial contracts that allow market participants to assume either a positive or negative exposure to a company’s credit to facilitate hedging and speculation.

“Although the size of the credit derivatives market has exploded, the backlogs and inefficiencies in its current technology infrastructure have created a transaction, confirmation and clearing process straight out of the seventies,” said Robert Benedetto, a manager with BearingPoint and co-author of the paper. “The extensive backlog in processing trades can create substantial operational risks for banks and other financial services companies.”

Benedetto predicts that the overstressed credit derivatives market infrastructure has created the potential for a financial disaster “if an event triggers a significant strain, such as a major US company filing for bankruptcy. Unless this technology is updated and improved, the industry will continue to operate with lead weights and put the health of the market overall at risk,” added Benedetto.

Terence Sawchuk, a management analyst with BearingPoint and co-author of the paper, pointed out that most credit derivative trades are not standardized and have to be reviewed individually by each party, raising the possibility of error and extending the time delay on trade execution. Sawchuk noted that the paper outlines steps that can be taken to improve the credit derivatives market, such as a new process for confirming trades and insights that can help companies avoid delays, leverage new technology and take a fresh look at processes and people to maintain business stability.

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