Global Infrastructure Will Reduce Risk for OTC Derivatives
LONDON, Nov. 14 /Xinhua-PRNewswire/ -- The Depository Trust & Clearing
Corporation (DTCC) announced today the launch of its Trade Information
Warehouse, creating a centralised and secure global infrastructure for the
post-trade processing of over-the-counter (OTC) derivatives.
The warehouse is made up of two components: 1) a comprehensive trade
database containing the "official legal record" for all contracts eligible
for automated Deriv/SERV confirmation, and 2) a central support
infrastructure that automates and standardises post-trade processes (such as
payments, notional adjustments and contract term changes) over the life of
each contract, which can extend five or more years.
Initially, the warehouse will support credit derivatives, and then extend
to other OTC derivatives products including rates, equities, FX and
commodities -- depending on market demand and input from the senior group
working with DTCC in guiding the initiative.
"The trade warehouse is a ‘just in time’ technological solution
necessary to support our vibrant OTC derivatives markets," said Robert E.
Diamond Jr., President of Barclays PLC. "My thanks to DTCC and all industry
participants who worked tirelessly to implement the warehouse in record time."
Current environment: A high degree of manual processing
Today’s OTC derivatives environment requires continuous bilateral
reconciliation for each contract. In other words, each trading party must
continually "sync up" with each of its counterparties over the life of each
contract, keeping track of post-trade events, such as assignments,
amendments, terminations and notional adjustments. Processing is not
standard across the industry, and the work involves considerable manual
processing relying on faxes, emails and phone calls.
The credit derivatives market more than doubled annually through mid-
2006, when the notional amount of credit derivatives reached $26.0 trillion
up from $12.4 trillion in mid-2005.
"The warehouse represents the launch of a very innovative and important
industry solution to improve process, efficiency and risk control in the
global credit derivatives markets," said Dick Weil, Chief Operating Officer
of PIMCO. "It was made possible by some exceptional cooperation between
dealers, investment managers and regulators."
The warehouse will automate many processes that occur throughout a
contract’s life cycle, which today involve significant manual effort. This
includes bilateral contract and cash flow reconciliation. Other post-
confirmation processes, such as credit event processing and assignment
processing, will be made much more efficient. From a risk management
perspective, the warehouse will help firms ensure accurate balance sheet
information for corporate and regulatory reporting purposes, support accurate
collateral management, and promote correct and complete payments.
"The implementation of the warehouse marks a milestone in the evolution
of the OTC derivatives marketplace," said Thomas A. Russo, Vice Chairman,
Lehman Brothers. "Our industry has come together in record time to put in
place a common operational platform to manage credit derivative contracts
over their life yielding standardization, efficiency and risk reduction."
Building on Deriv/SERV’s foundation
Today, 80% of credit derivatives traded globally are electronically
confirmed through Deriv/SERV, up from 15% in 2004. The warehouse builds on
Deriv/SERV by using confirmed trade details as input for the warehouse, so
that post-trade processing flows automatically from up-to-date trade terms.
"The trade warehouse is the successful result of a truly cooperative,
global effort on the part of both financial services firms and their
regulators," said Dr. Hugo Banziger, Chief Risk Officer, Deutsche Bank. "The
warehouse demonstrates their common interest to work together to bring about
growth and stability to our financial markets."
Warehouse launch plan and development
With today’s launch, all new trades and post-trade events submitted to
Deriv/SERV for electronic confirmation will automatically be loaded into the
Trade Information Warehouse. The warehouse will assign a unique reference
identifier for each contract, and maintain the "current state" contract
terms, taking into account assignments, terminations and amendments.
"Our goal is to provide a safe, efficient processing environment
globally -- modelled on the automated central asset servicing that central
securities depositories provide for equities, fixed income and other
securities," said Peter Axilrod, managing director, DTCC Business
Development. "The Trade Information Warehouse provides the underpinnings to
support the entire post-trade life cycle for OTC derivatives in a paperless
environment."
In 2007, the warehouse will expand to support central payment
calculation, and a central settlement capability through links with a central
settlement provider to streamline payment settlement. Also in 2007, the
warehouse will offer customers the flexibility of electronically reconciling
("tying out") complex or non-standard contracts that cannot be legally
confirmed through Deriv/SERV, replacing the customary telephone-based
approach.
The warehouse is designed with a flexible, but secure, open architecture
capable of being extended, and allowing other service providers to connect to
the warehouse. As a result, the warehouse will be able to offer additional
efficiencies in portfolio management, bilateral margining and other post-
trade processes, both directly and through links with other providers.
"We developed the warehouse in close collaboration with leading dealers
and buy-side firms over an aggressive ten-month timeframe," said Bill
Hodgson, vice president, DTCC Business Development, who led development from
London. "This has been a cross-border collaboration -- from developing
business requirements, to designing an operating model, to setting processing
standards, to testing. We anticipate that a wide range of industry service
providers will be connecting to the warehouse and offering complementary
services."
Background on the warehouse project
DTCC announced in February its plans to build the warehouse. Since then,
DTCC has been working aggressively with senior personnel from 19 leading
global dealers and the buy-side community (including traditional asset
managers and hedge funds) to develop this industry infrastructure solution.
The project is being overseen by a Senior Oversight Group, which has been
established by the OTC Derivatives Operations and Planning Committee of DTCC’
s Board to make implementation recommendations to the Board Committee.
Major credit derivatives dealers pledged their commitment to the
warehouse project, calling it "a material step forward in reducing
operational risk and increasing operational efficiency in the credit
derivatives market," in a letter to the Federal Reserve Bank of New York on
10 March 2006. Financial regulators have also publicly stressed the
importance of a global infrastructure for the credit derivatives market and
the Trade Information Warehouse.
Testing of the warehouse’s functionality began in September. In
addition, backloading, which involves populating the warehouse database with
trade data on existing contracts, has started and will continue through
2007.
About DTCC
The Depository Trust & Clearing Corporation (DTCC), through its
subsidiaries, provides clearance, settlement and information services for
equities, corporate and municipal bonds, government and mortgage-backed
securities, money market instruments and over-the-counter derivatives. In
addition, DTCC is a leading processor of mutual funds and insurance
transactions, linking funds and carriers with their distribution networks.
DTCC’s depository provides custody and asset servicing for more than 2.5
million securities issues from the United States and 100 other countries and
territories, valued at $31.2 trillion. Last year, DTCC settled more than $1.4
quadrillion in securities transactions. DTCC has operating facilities in
multiple locations in the United States and overseas. DTCC’s derivatives
services are offered through DTCC Deriv/SERV LLC, a wholly owned subsidiary
of DTCC. For more information on DTCC, visit http://www.dtcc.com .