Investment banks in Europe and the US are scrambling to recruit specialists in derivatives documentation. But jobs in the area could prove short-lived.
"There has been an awful lot of demand this year for people to work on over the counter (OTC) derivatives confirmations," says Mike Hartwell, managing director of London-based specialist operations recruiter Hartwell Buck. "There's a massive shortage of experienced staff, so banks are hiring waves and waves of juniors outside normal graduate recruitment schemes. It's a high profile issue and they are throwing bodies at it."
Brian Drum, managing director of New York City-based recruiter Drum Associates, paints a similarly upbeat picture on Wall Street: "Any kind of derivatives role back office role is hot. It's hard to automate the process of booking derivatives trades, and banks are interested in talking to people who really know how to deal with the complications that arise in the process."
You don't need to be Sherlock Holmes to unearth the source of banks' enthusiasm for specialists in derivatives confirmations. Last September, leading US and European investment banks promised the New York Federal Reserve to eliminate existing backlogs in credit derivatives confirmations by June 2006. The task is considerable: according to the International Swaps and Derivatives Association (ISDA) the total notional value outstanding for credit default swaps was $12.4 trillion by mid-2005. The average backlog was 11.6 days.
Delays in confirming trades are prompting concerns that investors and dealers could be unsure of their trading partners in the event of a default, hence the call to action. As well as adding new hires, senior back office staff at leading banks have grouped together in a series of 'lock-ins' to go through the outstanding trades.
The shortage of people experienced in the finer art of derivatives documentation is also generating a need for supervisors and trainers to bring junior hires up to speed.
Richard Lett, manager of the temporary division at recruiter Jonathan Wren in London, says several banks have brought in trainers on a contract basis: "People who have been doing simple fixed income settlements are being trained to work more with complex products."
Guy de Brabois, a senior consultant in the banking division of Robert Walters in France, reports a similar trend in Paris: "Banks are looking for managers who can train people in settling derivatives."
Offshoring and electronic systems spoil the party
Longer term, however, demand for derivatives settlements specialists could wane. The US-based Depository Trust & Clearing Corporation offers an electronic matching and confirmation service for derivative products, known as Deriv/SERV. But its take-up has been slow thanks to a lack of master confirmation agreements and the use of different definitions and names for standard trades. Both issues are now being addressed, and dealers and clients have committed to make better use of the service in future.
As this happens, the need for human intervention is likely to fall, with the exception of disputed and the most complex trades.
And these bastions of human involvement may yet move offshore. JP Morgan is moving much of the processing of credit derivatives trades to Mumbai and Bangalore in India. Chris Gentle, a financial services offshoring expert at accountancy firm Deloitte, says others will follow: "Banks are identifying processes that are labour intensive and heavily pape- based and offshoring them. Derivatives clearing and settlements is one of those areas."
This is the downbeat assessment of job prospects for back office derivatives specialists. Fortunately, not everyone is quite so gloomy. Tracey Pirrie, a specialist operations recruiter in New York City agrees there's no need to panic. "Back office tasks for the most complex derivatives products won't be outsourced in any great number. As products become more complicated and the timeline becomes more critical, banks are more likely to move them within the US."