Streamline Derivative Trading Process

Credit-derivative traders usually agree to the terms of a trade over the phone. After that, a dealer typically records the trade and sends an email or electronic message to the client to confirm the trade. In other instances, a firm on one side of a swap may ask another dealer to take its position, in a process called "novation." That requires the approval of the firm's original trading partner, and such requests are also commonly sent via email. When such requests surge, dealers have to sort through hundreds of emails. In their letter to the Fed, market participants said one of their goals is to make better use of electronic platforms to handle these novation requests and confirmations. A few years ago, regulators became aware that some traders were scribbling down details of derivative trades on scraps of paper and leaving the trades unconfirmed for weeks or months on end. Concerned that markets might malfunction if some companies failed and firms didn't have a good grip on their exposures to others, the Fed in 2005 pushed large dealers to clean up their large backlogs of derivatives trades and outstanding confirmations. That effort was largely successful, but recent market events have shown that more needs to be done.