OTC Derivatives

AI for Managing OTC Derivative Confirms

January 15, 2021

Thomas Egbert, VP Strategy

The late afternoon OTC problem

It's 4:42pm, and your middle-office team is diligently reviewing the queue for unsettled trades and completing the end-of-day checklist. Things have been running smoothly. Today's batches of exchange-traded and centrally-cleared derivatives have been processed without fuss. And then you see it on your second monitor. It’s the dreaded bespoke OTC derivative task queue. Not again! A yellow flag indicates the all-too-common pitfall... another unsettled trade sailing past T+5.

Sound all too familiar?

Uncleared OTC derivatives remain prevalent given their beloved flexibility, but there's not much OTC-love from middle office teams due to the post-trade mess. Document capture and scrutiny, exception handling, break resolution, affirmation/confirmation, and other critical workflows are notoriously cumbersome. Based on interviews with our buy-side clients, we estimate that post-trade processing related to bilateral ISDA transactions actually consumes more labor hours than the processing of electronic/cleared transactions. This, even though they represent just a fraction of the contract volume.

OnCorps data scientists estimate that over 20 percent of bespoke ISDA confirms contain an economic, legal, or other contractual discrepancy.

The reason is simple: complexity. 

The whole business of the uncleared OTC market is about non-standardization, which inevitably gives rise to post-trade complexity. Non-standardization in the front office has meant heavily manual (error-prone) post-trade handling in the middle office. That is, until algorithms and AI swept in. There’s a new sheriff in town.

AI is becoming entrenched in all kinds of industries, from medicine to manufacturing, and finance is no exception. That’s largely because lower frequency data sets such as bespoke OTC contracts reveal patterns over time that are not obvious to the human eye and brain.

Let's review the steps needed for a buy-side middle-office team to manually confirm a clean bilateral OTC trade:

  1. Monitor dashboard for unconfirmed trades
  2. Log in to workflow tool to view incoming confirms
  3. Filter trade blotter for newly received confirms
  4. Search through email for PDF confirm from broker/dealer
  1. Visually/manually link the internal trade ticket to paper confirm based on counter-party and trade identifier
  2. Perform initial "eyeball" review of legal and economic terms in text comparison window
  3. Perform secondary, manual review of economic terms side-by-side between trade ticket and confirm
  4. Assign confirm to appropriate signatory; open outlook; send email to signatory
  5. Append signature in confirm manager and manually change status to 'Executed'

Now let's evaluate the process when OnCorps AI's cloud app handles the PDF confirm:

  1. Parsing. OnCorps system automatically ingests the PDF confirm, and extracts all economic and legal terms, including block trade allocation data.
  2. Matching. The entire confirm document is algorithmically matched and reconciled—with respective trade ticket, including block trade allocations— in the time it takes for one of the manual tasks above (1,000+ allocations matched in 1.5 seconds). Your team is saved countless post-trade processing hours each week.
  3. Affirm + Confirm. Trades can be Affirmed in less than 10 seconds. Algorithms catch the potential errors (big and small) that keep your Chief Risk Officer up at night.

OnCorps AI's OTC Cloud Confirm App was built in partnership with leading middle office teams to simplify, streamline, and de-risk ISDA post-trade. It just works.

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