Exotic growth is hitting the post-trade wall

The structured products market is expanding rapidly, but the infrastructure supporting the increasingly complex OTC derivatives used to hedge those products is struggling to keep pace.

Every new hedging relationship creates another bilateral contract to match, confirm and maintain - Daniel Ivanier

Global structured product issuance exceeded US$1.9 trillion in 2025, more than double 2020 volumes, as investors continue to seek customised investment outcomes and global private wealth expands. Each note generates an exotic OTC derivative that must be hedged, with products such as autocallables and accumulators generating contracts involving hundreds of separate events and trade mechanics.

At the same time, the competitive landscape is changing. Non-bank liquidity providers are building equity derivatives hedging capabilities, while banks face greater pressure on capital and the cost of warehousing exotic risk.

That competition is tightening pricing, but it is also adding to an already fragmented post-trade environment, according to Daniel Ivanier (pictured), CEO of Fragmos Chain at Delta Capita.

“Every new hedging relationship creates another bilateral contract to match, confirm and maintain,” says Ivanier. “The market is growing, but the post-trade infrastructure has not evolved at the same pace.”

Fragmentation creates friction

Ivanier identifies standardisation as one of the industry's biggest challenges. Firms operate across a patchwork of platforms, including Murex, Calypso, Summit, Aladdin and proprietary systems, while processes and configurations can vary significantly between institutions.

“Even the same system can be used differently, creating inefficiency,” he says.

The problem is particularly acute in OTC derivatives, where there is no single reference record shared between counterparties. Unlike a structured note, where the issuer maintains the reference record, each side of an OTC transaction maintains its own representation.

“That creates scope for discrepancies throughout the trade's life,” says Ivanier, adding that for buy-side firms, the issue extends beyond the difficulty of integrating different systems. “They are also increasingly frustrated by a lack of transparency from dealers, particularly around the terms, valuations and lifecycle of OTC derivatives.

“This can make it harder for firms to independently validate positions and understand how risks and cashflows are being managed.”

New entrants, new operational pressure

The rise of non-bank liquidity providers is adding another layer of complexity. Many large non-bank providers, alongside some smaller banks, lack purpose-built infrastructure for complex structured products and instead rely on spreadsheets and ad-hoc scripts.

Such approaches may work at limited scale but can create problems around valuations, volatility indicators, coupon calculations, barriers, events and other lifecycle operations.

Non-bank providers are nevertheless investing in equity derivatives hedging capabilities as market growth creates new opportunities and bank capital constraints make exotic risk warehousing more expensive.

“More competition is tightening pricing,” says Ivanier. “But for new entrants, each long-form confirmation negotiated by hand adds unwanted headcount, while every matching break diverts capacity from risk-taking.”

For issuers, the proliferation of counterparties creates a similar problem, with every additional relationship generating another set of bilateral records that must be reconciled.

The result could be a “two-speed” market, according to Ivanier, with firms that have scalable technology and robust operations able to expand while those without adequate infrastructure struggle with valuation, risk management and operational problems.

“Some firms may recognise their limitations and scale back, while others may underestimate the operational logistics until it is too late,” he says.

Post-trade remains largely manual

Historically, the relatively small size of structured and exotic businesses compared with flow products meant there was less urgency to industrialise post-trade processes.

That has changed.

The complexity of exotic derivatives makes them particularly difficult to standardise. Bespoke payoff structures – including autocallable features, knock events, worst-of provisions and different underlying instruments – can be represented differently in each firm's systems.

“These differences create matching breaks, confirmation delays and manual investigations involving operations, trading desks and legal teams,” Ivanier says.

The problem does not end when a trade is booked. Exotic derivatives generate a long list of lifecycle events, including barrier observations, option exercises, resets and corporate actions.

“If counterparties' records diverge after an event, future cashflows and event processing can also diverge,” he says.

Confirmations themselves remain cumbersome, with product-, region- and counterparty-specific templates requiring extensive legal input. Matching can also require human interpretation of inconsistent formats and descriptions.

“Existing confirmation and matching rails were built for standardised, high-volume products,” says Ivanier. “As a result, operations teams at dealers and non-bank liquidity providers still rely on PDFs, emails and manual controls for exotic derivatives.”

He does not, however, envisage a world of complete automation.

“Some components can be highly automated, but 100% automation is not realistic,” he says. “Humans will still need to make decisions where there is complexity or ambiguity.”

The case for a collective approach

Banks remain divided on whether these functions should be outsourced. Large dealers often believe they can build and operate the necessary infrastructure more effectively in-house, supported by their own platforms and straight-through-processing solutions.

The problem, says Ivanier, is that STP often stops at the edge of the institution.

“STP within a bank often fails to extend to counterparties, causing integration problems,” he says.

Nevertheless, there is growing interest among tier-one banks, buy-side firms and tier-two and three institutions in industry-wide approaches and platforms. The challenge is overcoming the familiar chicken-and-egg problem, with participants reluctant to move until their counterparties do the same.

Ivanier argues that the industry should focus on a collective approach rather than a series of bilateral technology builds.

Regulators have recognised the need for greater automation and digitisation, but he believes they have been relatively passive in driving post-trade change.

The Common Domain Model (CDM) has provided useful foundations, particularly around regulatory reporting, but its application needs to expand into practical post-trade use cases such as confirmations, lifecycle processing and event management.

“A common standard alone, however, is not sufficient,” says Ivanier. “A scalable model must capture the full range of economic terms, legal provisions and lifecycle events and compare counterparties' records across all relevant data points.”

The objective should not be a single industry platform, he adds, but common data standards and interoperable infrastructure.

The next competitive battleground

The implications extend beyond operational efficiency. As non-bank liquidity providers enter the market, greater capacity and sharper pricing should ultimately benefit issuers and investors.

But the infrastructure supporting that competition was built for a market that was smaller and less complex.

For non-bank entrants, Ivanier argues that digital matching alone will not be enough. They need end-to-end post-trade execution based on a complete and validated contract record, capable of supporting automated lifecycle processing, targeted AI assistance and stronger controls. These are among the capabilities being addressed by Elaris OTC, the platform developed by Delta Capita and Fragmos Chain.

Fragmos Chain has a strategic partnership with Delta Capita, including capital considerations and business integration, and Ivanier says the firms are seeing strong interest from major banks and buy-side institutions in a collective platform approach.

“The next constraint on growth may be whether post-trade infrastructure for exotics catches up,” he says.

As competition transforms the economics of structured products hedging, the ability to process, reconcile and manage the resulting OTC risk could increasingly determine which firms are able to scale.

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