New technology has enabled a number of smaller banks to reduce their OTC derivatives processing costs, according to a new survey by consultancy Z/Yen.
The survey is based on the processing costs, headcount and trade volumes of 14 major banks and covers 11 product types including Interest Rate Derivatives, Credit Derivatives and OTC Equity Derivatives.
For Interest Rate Derivatives, total annual processing costs per bank ranged from $2 million to nearly $80 million while trade volume ranged from 4,000 to nearly 200,000 new deals per year.
The most cost-efficient banks were those with mostly vanilla trades and processing staff based outside of London. One bank in particular has utilised new technology to reduce its headcount by 75% with the result that an Interest Rate Swaps now costs less than $100 to process. However, exotic trades are more expensive to process at all banks with an average cost of $1,500.
The survey also calculated that the Cost per Confirmation is between $15 and $60 and the Cost per Settlement is between $20 and $100. Here, it is clear that participation in industry initiatives, e.g., SwapClear, DTCC, can help to drive down costs.
For Credit Derivatives, it is clear that banks have made significant efforts to automate the processing of “flow” trades, e.g., Credit Default Swaps. These now have an average Cost per Trade of $390, which is only 40% higher than Vanilla Interest Rate Swaps ($280). Again, structured and complex Credit Derivative trades were significantly more expensive to process, Cost per Operations Head also varies widely between firms from a high of $155,000 per year to a low of $75,000. This is primarily due to location with those banks still processing in central London being much more expensive.
“At a time when most banks are planning to reduce costs by relocation, it is clear that a technology is still the key to promoting efficient processing,” says Jeremy Smith, Z/Yen’s Director of Financial Services. “While relocation can save costs in the short-term, the survey proves that without well-focused investment in IT, there will always be the need for large numbers of staff in back-office functions.”