The use of over-the-counter (OTC) derivatives – contracts that are traded and negotiated directly rather than via an exchange – has enjoyed a growth spurt in recent years. This has given the parties processing these trades in the middle and back office a substantial headache.
Since the Bank for International Settlements (BIS) reported on OTC derivatives in September 1998, the total notional amount of contracts outstanding has increased at an average annual rate of almost 20% with a further burst of activity in 2006. According to the global trade association for OTC derivatives, the International Swaps and Derivatives Association (Isda), by the end of 2006, notional contracts outstanding were worth $34,500bn.
