Aside from death and taxes there are two more facts that are quickly becoming cliché: The number of derivatives products in use is limited only by imagination, and the complexity of these products is constrained only by the limits of today’s technology.

Cutter recently surveyed large asset management firms about the practices and technologies they use to manage their derivatives portfolios. While some findings were in line with common beliefs, others were not as intuitive. Most of the firms have been trading multiple types of derivatives for several years – some as many as 20 years. With such a long lineage of derivatives trading one would think that the firms had streamlined their processes and fully, or mostly, automated their operations. We found otherwise. Consider:

• Almost all firms push derivative trades through their existing OMS. A lack of solid vendor solutions for the buy side and the high prices for the sell-side oriented offerings that are available prevent firms from implementing more efficient solutions.
  
  
• We found no firm that had fully automated its support processes. The most common reason cited was the complexity of the instrument. Some firms prefer to keep certain activities (e.g., valuation, executing custom deals, and making irregular payments) manual to prevent potentially costly errors.

• Most firms still rely on faxes to confirm trades. This practice is manually-intensive and error-prone, and it creates transaction delays.
  
  
• Less than half of respondents have automated the process to manage collateral agreements, track positions, or make margin calls.
  
  
• Slightly less than half of all firms still utilize a manual process including Excel to value derivatives and only one-fourth have the desired single or derivatives accounting system.

With at least some derivatives products expected to grow by more than 100% this year, according to Howard Lutnick, CEO of Cantor Fitzgerald, a train wreck could possibly be in the offing. Leading firms, however, recognize the value of available instruments and are taking steps to prepare for long-term, sustainable growth by:

• Developing or acquiring trading platforms that meet the flexible requirements of derivatives products. They are continuing to explore vendor solutions, but are enhancing legacy systems to meet today’s needs. Lack of product standardization will preclude the availability of comprehensive vendor solutions for the near future. For this reason, Excel will be the most common software tool used to support derivatives for the next few years.
  
  
• Building and refining processes to pro-actively manage risk (e.g., weeding out inappropriate assets before they can be introduced to a portfolio).
  
  
• Implementing dedicated accounting systems that can support multi-legged deal structures, irregular payments, custom deals, and more complex security types.
  
  
• Maintaining a central source of pricing data that is available for both trade analysis and ongoing valuations.
  
  
• Using industry tools, such as DTCC Deriv/SERV to help promote standards and reduce risks associated with confirmation processing.
  
  
• Deploying automated workflow tools to more efficiently manage the entire process from front to back.

Increased demand from buy-side firms has been noticed by the vendor community. The sell-side vendors are re-configuring their applications and workflows to better align with buy-side operations. And the buy-side vendors, particularly those with OMS solutions, are scrambling to build out their platforms to accommodate the complexities of derivatives products.