'It is crucial that the sell-side community, the financial services industry and regulators work together to develop new approaches to processing and servicing these complex transactions,' says State Street president and chief operating officer Jay Hooley. 'Our report frames the issues that are key to success, and encourages discussion about the most effective ways to address standardisation and the adoption of industry best practices.'

The latest in the series of Vision Reports contends that the volume of OTC trades may prove a challenge for legacy technology systems. The technology platforms used to process these trades were originally designed to process traditional equity and fixed-rate transactions, but are now handling non-traditonal trades as well.

'Growth in the derivatives space and the customisation of many products, raises questions about risk management and post-trade administrative support for these transactions,' says Neil Wright, senior vice president and product manager for derivatives servicing at State Street.

'The challenge lies in capturing and recording all of the relevant features and terms contained in a transaction. With increasing volumes and complexity, the range of procedures to confirm, process and otherwise manage the trade life-cycle of OTC derivatives needs to be automated. In addition, providers will need to keep pace with the increasingly sophisticated analytics needed for derivatives trades.'

In relation to the servicing and administration of derivative trades, State Street's report says that greater consistency of information, a more streamlined flow of reporting, rigorous statistical analysis, independent pricing and risk modelling, and superior expertise and insight are needed to work effectively with the data. All of these features require a significant investment in infrastructure, technology and human capital.

Given the key role of third-party custodians and asset servicers in supporting the derivatives market, State Street's report highlights four best practices as benchmarks for post-trade activity. These practices are: reliability, flexibility, transparency and trained expertise. All four, taken together, are important for meeting the challenges the market faces and for maximizing the strengths that derivatives, when properly used and managed, can offer, the report says.