Operational Risk Management in OTC Derivatives in Asia

by Anshuman Jaswal, PhD, September 21, 2011
Industry Trends
Asia-Pacific

Abstract

Operational risk relates to losses resulting from inadequate or failed internal processes or external events. It has come into greater focus in the last four to five years among OTC derivatives market participants, particularly in the wake of the financial crisis.

In a new report, Operational Risk Management in OTC Derivatives in Asia, Celent looks at issues Asian markets have had with operational risk. The markets have been making efforts to reduce operational risk, and this practice has generated legal documentation that ensures standard procedures are available for executing transactions. Due to improvements in both technology and regulation, market participants have gradually moved to electronic trade processing. These efforts are likely to be boosted by mandatory use of data repositories and widening use of central clearing.

“Operational risk management has become much more important in the last few years,” says Anshuman Jaswal, Celent Senior Analyst and author of the report. “Attempts by regulators to improve transparency and reduce operational risk will bear fruit only if OTC derivatives market participants have the necessary reporting mechanisms in place. If that occurs, information sharing will become a vital element in their processes.”

This report considers the volumes of OTC derivatives traded on a global basis, as well as the operational performance of the market participants. The report then looks at the various factors and drivers that lead to operational risk and the use of capital requirements to mitigate this risk. The Basel II and III frameworks for operational risk management provide insights on how banks manage this risk. The report concludes with best practices to ensure firms minimize the levels of OTC derivatives operational risk in their organizations.

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America
Michele Pace
mpace@celent.com
Tel: +1 212 345 1366

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81 3 3500 3023

Table of Contents

Executive Summary

3

Introduction

5

Market Overview

6

 

Operational Risk and the Asian Market

6

 

OTC Derivatives Volumes and Processing

6

Factors Causing Operational Risk

14

Basel Framework on Operational Risk

19

Best Practices for Managing Operational Risk

21

Conclusions

23

Leveraging Celent’s Expertise

25

 

Support for Financial Institutions

25

 

Support for Vendors

25

Related Celent Research

26

Sign in to download reports and access personalized information