According to the latest ISDA SwapsInfo Quarterly Review published earlier this month, the trade count for interest rate derivatives increased by over 20 per cent in 2022, rising to 2.3 million (up from 1.9 million the previous year). This surge in IRD trading activity poses several challenges for investment banks, not least of which is cost control.

Some banks have been paying millions every year to facilitate IRD transactions across OTC markets. As IRD trade activity rises, so too do the fees they pay to their inter-dealer brokers. Of course, banks can negotiate rates with their brokers, but those rates can vary drastically depending on the specific nature of the IRD trade, making it hard to calculate their overall costs.

As a case in point, an investment bank may well be running an IRD trading strategy with two or more different structures to it. One strategy could combine a spread designed to profit from an uptick in the value of an underlying asset, and a spread conversely aiming to profit when the same asset declines. If the banks can’t identify this type of strategy in their post-trade processing, then there is no way of knowing which IDB rate to apply for the trade.

Over one-third of IRD trades are strategy-driven but by the time the trade gets into the back office, all the IDB sees is one leg to match off to on the other side of the trade. If the trade hasn’t been booked correctly, and the bank can’t identify the specific trade type, they could be charged per leg when they shouldn’t be.

So how do banks keep on top of these expenses and reduce the potential overspend across their IRD trades?

The answer lies in getting their data houses in order. Many banks still rely on dated and disjointed upstream systems, which makes it incredibly difficult to locate and centralise all the data they need to run their calculations efficiently and accurately.

All too often, they are sending their trade data to multiple systems within their brokerage ecosystem. By the time the key information gets to the back-office billing system, they are inevitably missing some of the data that originated upstream. In all too many cases, they rely on manual processes to piece that crucial data back together before they can make accurate calculations.

This longstanding lack of transparency means they are potentially paying twice, paying too much or simply not understanding what they are paying for. Unless rate cards are digitised and accessible centrally, it is extremely difficult to identify where fees are out of date and ripe for renegotiation, or to manage broker relationships to optimise spend across the entire organisation.

While the recent increase in IRD activity offers up its own complexities, getting to grips with brokerage costs across all asset classes is crucial for banks seeking to protect their trading profits.

Click here to learn more about how we can help you achieve greater transparency and cost control across your trade-related expenses.