Spending on credit derivates IT rockets to $500m

IT spending on credit derivate trading systems is set to rise by 45 per cent to almost $500m this year as banks rush to automate the settlement process and cut the cost of transactions.

The investment in automation is vital for dealing with the rapid increase in credit default swaps (CDS) trades, with many of the world's largest credit derivate dealers struggling with backlogs of unconfirmed trades and high levels of manual mistakes.

The report, by US research consultancy Aite Group, shows the cost per trade has already fallen to $420 from $570 in 2004 and predicts it will fall further to just $190 by 2008.

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The report said: "The increased use of electronic messaging, automated confirmation generation, affirmation at the point-of-trade and electronic matching will be large factors in not only lowering processing costs but minimisng operational risks and lowering costly and time-consuming errors."

The key areas where increased electronic trading and automated processing are taking place are the electronic point of trade; the electronic representation of documentation and workflow handling; and affirmation, confirmation, matching and settlement functions.

The US credit derivates sector in particular is playing electronic catch-up with Europe because around 90 per cent of its trades are still paper-based, according to the Aite report.

Aite predicts credit derivatives IT spending will grow at a more moderate 20 per cent from next year.