It's fair to say that the credit default swaps market has really overwhelmed its processing infrastructure, at individual firms and in the industry as a whole. In some ways, you can generalize that and say that the entire OTC derivatives infrastructure really needs a shot in the arm from an automation point of view. While the compound growth rate in notional value of outstanding credit derivatives has been more than 100 percent in recent years, we can assume that the market may flag a little. But, even as the politicians haggle over the merits of more regulation, it will not go away. It is here to stay.  

One thing that would help from an industry and regulatory point of view would be straight through processing (STP). A recent Celent report, "Managing OTC Derivatives Risk: Building Capabilities to Tame the Giant," notes that this idea of "seamless integration of systems and processes to automate the trade process from end-to-end without any manual intervention" has recently gained momentum. Of course, it would be hard to disagree with the benefits. It's the implementation that's a problem. As of now, the solutions market remains fragmented. So it's really incumbent on individual firms to get their own risk management houses in shape. That's about the most you can do at a time like this. 

Celent recommends the following as solutions are crafted:

* A clear IT architecture and operational vision needs to be articulated.

* A common, unified counterparty, issuer, and legal entity representations are key to achieving a firm-wide view of OTC and overall risk.

* Workflow standardization efforts need to take into account software/utility workflow limitation early on.

* Firms need to account for OTC trade utility failure points and concentration of operational risks.

* Scenario parameters and other dynamic macroeconomic variables should be decoupled from analytics and models in order to facilitate consistency and perform integrated stress testing and sophisticated scenario analysis across risk types.  - Jim