5 operational challenges caused by paper-based OTC confirmations

Over-the-counter (OTC) derivatives present a world of opportunity for the front office. It’s a completely different story for the middle and back office, however. The bespoke nature of these trades, and the complex documentation they require, pushes technology and teams to breaking point.

Much of the critical post-trade data needed to process an OTC trade still arrives in unstructured, ‘paper-based’ formats. For example, PDFs sent via email. These confirmations carry essential economic terms and trade details, but extracting and validating that data is anything but straightforward.

Let’s unpack the key challenges of managing PDF-based OTC confirmation data – and explore why solving it should be a top priority for any Head of Operations.

1. The battle for operational efficiency

Legacy technology is not designed to deal with unstructured data like PDF confirms. Newer tools may only have limited unstructured data capabilities, or require an additional tool – often a point solution – to handle extraction. So Operations teams must first figure out how to get data into a shape their reconciliation, reporting and risk systems (to name a few) can accept.

Many teams have to handle this task manually. That means downloading the confirmation and copy-pasting, or keying, the data into your systems. This could take 2-3 hours per deal and they may have hundreds of deals per month to process. It requires multiple analysts to process the deals and managers must review their work.

For a long time, this has been the only way to manage OTC derivatives data; hundreds, or even thousands, of expensive analysts performing repetitive manual tasks instead of valuable work.

Which leads us to the next challenge…

2. Suboptimal use of resources

Your Operations team are highly-educated specialists, yet they have to step in to compensate for data the technology stack can’t handle. The shortcomings of legacy technology leaves you no option but to process OTC confirmations manually. Your teams spend much of their time performing repetitive manual tasks, like reviewing two copies of the same data side-by-side to check for errors.

It’s not what you or they want them to be doing with their time. Everyone benefits if your teams are able to perform the most value-adding tasks, such as investigating and fixing data errors.

3. Lack of scalability

Most Operations teams are already struggling to keep up with the current volume of OTC trades they have to process. This leaves them with large backlogs of trades to work through as well as handling today’s trades.

If the current setup can’t meet today’s demand, there’s no way it can scale to meet tomorrow’s. Manual processes hold you back, because the only way to expand your capacity to process more volume is by hiring more staff. This is expensive and time-consuming, as it would take months to fully onboard new team members.

Even if you did have the budget to increase headcount, higher volume will result in more errors, creating more work and risk.

Speaking of which…

4. Manually processing OTC confirms increases operational risk

Manually processing data leads to a lot of human errors. The longer these errors remain undiscovered, the more risk they create. Even something as simple as accidentally keying in the wrong currency code. This is because of two factors:

• The duration of derivatives trades means that the error could be live for a long time and cause issues with subsequent updates
• The number of systems that use the data means one error quickly becomes many

Errors not found and rectified fast enough can cause issues like outdated trade parameters, incorrect trade bookings and discrepancies between your internal records and those of your clients.

Unpicking these errors once they have spread throughout your tech stack takes a long time and uses up costly operational resources.

And that’s not to mention the regulatory fallout from reporting incorrect data.

5. Broken audit trail

Regulators are increasingly focusing on the controls you have around your reporting data, not just the quality of the data itself. You must be able to show the journey data has taken through your organisation and what has happened to it across its lifecycle.

This is incredibly difficult if your data has a fragmented journey involving emails, spreadsheets, messaging services like Slack or Teams, or being copied from system to system manually.

The end result is an opaque trail that makes tracking down what happened and where a huge pile of work you don’t need.

How to overcome these OTC challenges

Taking the right approach to tackling these challenges helps you meet your key priorities, including clearing your backlogs and keeping up with demand, while also keeping costs down.

Automating the ingestion and reconciliation of OTC confirmations data helps you to reduce operational risk from sources such as manual errors, mounting backlogs of unprocessed trades, and complex tech stacks.

And it’s better for your teams and your ability to attract and retain the best talent. Your smart, highly-knowledgeable staff can put their expertise to good use. They can focus on value-added work, not on repetitive manual tasks like data entry.

Ready to tackle these OTC challenges? Duco’s AI-native operational data automation solution offers a fast, agile way to automate your OTC confirms data. Watch an in-depth dive into the platform to see how.