The CDS market has, in many ways, revolutionized modern finance. Growth continues to explode, with CARG expected to be in the high 70 percentile range over the next few years. A lot of ink has been spilled about the lack of automated, industry-wide clearing and settlement systems. Regulators have been all over the issue. Various vendors are moving to tap the opportunity.   

All of which makes the Tabb Group report "Credit Default Swaps: The Risk of Inefficient Markets" a very timely read. It makes clear to me that while grand solutions that would automate the entire processing chain should remain on course, there is a lot that companies can do right now to keep the market from buckling. While confirmations seem to get a lot of ink, the report highlights affirmations. The very simple point is that if affirmations are wrong, there can be no confirmation.  

The issue is compounded in the CDS market because both new trades and so-called novations--which involve reassigning a counterparty for each transaction--must be affirmed. Novations actually require action from three counterparties, rather than two. They really can escalate the volume and confusion. The report by Kevin McPartland suggests that the industry needs to make good affirmations the responsibility of traders; that is, the front office, not the back office. Even if you have the front and back offices working in concert, traders are still the logical entity to affirm trades on T+0--who else really can do this?--even if the trade is not confirmed until T+5. The point is to cut back on affirmation mistakes, the bane of the industry. This can be achieved only if the process is easy for traders, requiring little additional effort.  

But how do we get to an industrywide affirmation system? Well, the technology exists; it just would take some industry cooperation to build a central hub for affirmations of trades and novations. The sell-side is best positioned to do this. Realizing the likelihood that volume will expand, big broker-dealers have every incentive to do this. So why hasn't it happened? - Jim