The operational impact of more OTC trades

OTCs that were at the cutting edge a few years ago (like CDS or IRS) are now fairly common and consequently adhere to well understood standards. But with the increasing volume and variety of OTCs it is almost impossible for the back office to maintain an effective working knowledge of all the advances being made by their traders.
The result is a processing gulf – particularly in reconciliation between counterparties, and in obtaining valuations - the latter being a major issue for the fund administrator, who not only has to obtain a price, but live by its implications also.

How to bring more order to your operations

If we were to focus on just these two issues – reconciliation of OTC data and obtaining valuations, it could still represent a lifetime’s work, so where do we start?
First stop is to understand the impact of any changes, so an operational review with an ROI analysis is needed. This enables any changes to be prioritised and phased to address areas of high manual intervention and opportunities to reduce large volumes of exceptions.
Smooth reconciliation of OTC data requires consistency of naming conventions followed by the automation of all data rec processes that can be effectively achieved between the hedge fund, its prime broker(s) and the fund administrator. By taking this approach the exceptions become just that, and not the rule.
Most hedge funds need a more proactive approach to pricing through a combined application of systems, tools and external agencies. And before embarking on this journey, it is well worth checking through offer memoranda in order to prioritise this work.