Where do we go from here? This is the question posed in a recent paper from analyst Aite Group, exploring trends in OTC equity derivatives. OTC equity derivative growth has been steadily increasing – the market grew by a year over year rate of 32 per cent as of June 2006, according to the International Swaps and Derivatives Association – but rapid growth is being constrained by the inability of operations to keep up with trading innovations, Aite suggests. One of the key factors constraining growth is the “lack of standards in processing protocols”, it says.
“In a general sense, there is very little standardisation in identifying OTC derivatives instruments,” Aite writes. “There are no general identifiers like Cusip numbers. Specifically, in stock instruments, there is almost no standardisation from the perspective of properly identifying underlying equities.” Traders in the market will often use Bloomberg codes to identify the underlying equity in an OTC equity derivative, it says, but the codes then have to be mapped, for translation purposes, on to another set of codes, such as the Reuters Instrument Code (RIC) or within a utility.
The paper also highlights the impact of corporate actions on OTC equity derivatives. Aite says: “The ability to maintain a proper feed of relevant data for corporate actions and the effect on the underlying equity to the derivatives transaction in place is certainly one of the challenges in OTC equity deriv-atives over the lifetime of the trade.”