Markit to Acquire Swapswire to Fortify OTC Derivatives Processing Infrastructure

UK data supplier Markit announced an agreement to acquire Swapswire, an electronic trade confirmation network backed by dealers for processing OTC derivatives. Financial terms were not disclosed. The acquisition is expected to close in early 2008.

The deal follows a string of acquisitions by Markit and solidifies Markit’s role as a powerhouse brand position in the derivatives space, comments Brad Bailey, senor analyst at Aite Group, in an email sent to the media. Markit, which is 70 percent owned by major derivatives dealers, provides pricing, a portfolio valuation service, trade processing of OTC derivatives through its acquisition of Communicator last year, and owns indexes. Last month, Markit bought out International Index Company (IIC), owner of the iTraxx Indexes and CDS IndexCo, which owns the CDX indexes.

“Swapswire has helped out a lot on the interest-rate swap confirmation process, “ says Bailey in an interview. “Most of the dealers use them and they’ve been getting a lot of traction on the equity derivatives side as well,” says Bailey. Interestingly, Markit is 70 percent owned by the major dealers derivatives dealer and Swapstream is 95 percent owned by the major derivatives dealers, notes Bailey.

Swapswire is an automated service, owned by 21 dealers, that allows market participants in the OTC derivatives markets to complete trade date confirmations immediately upon execution. Major dealers, inter-dealer brokers, prime brokers and buy-side institutions rely upon on the service.
In a statement, Markit said it plans to combine the Swapswire confirmation capabilities with its trade processing workflow platform to provide the OTC derivatives market with a cross-asset trade processing solution, critical mass and a global network. The enhanced platform will have over 200 buy-side institutions, 50 dealers and 45 inter-dealer brokers.

With the relentless growth in OTC derivatives, which has put pressure on operational infrastructure and raised regulatory concerns, Chip Carver, CEO of Swapswire, stated that the industry faces significant hurdles. By combining Swapswire and Markit together, “We will be able to provide the financial markets with the best possible tools to overcome these challenges,” Carver further stated in the release. The combined business will be co-headed by Jeff Gooch, EVP and head of trade processing and valuations at Markit and Carver.

According to statistics from the Bank for International Settlements (BIS), the OTC derivative markets grew by 25 percent in the first half of 2007, compared to 12 percent in the second half of 2006. Meanwhile, the average number of outstanding confirmations doubled year-on-year, according to Markit’s Quarterly Metrics report, which surveys operational data from the top 18 dealers. Markit says the aggressive volumes have led to mounting backlogs of unconfirmed trades, which attract regulatory scrutiny.

Bailey agrees, “There are still a lot of fundamental problems with derivatives processing such as front-office errors.” This summer’s credit crisis highlighted a lot of problems the market is having in terms of errors, he says.

In a statement, David Lown, EVP at PIMCO, which is a buy-side client of Markit’s comprehensive workflow services said, “the deal will be of immense value to the buy-side community. The integration of SwapsWire’s real-time confirmation tool into the Markit service will give us a cross-asset platform with electronic straight through processing, allowing us to support our growing OTC derivative businesses with greater operational efficiency,” added Lown.

Bailey said the combination of Markit and Swapswire “is a positive step from a buy-side perspective,” because buy-side institutions are confused about resource allocation decisions and which vendors will be around in the future. Also, Markit will eventually provide connectivity into two industry confirmation systems.

Through Communicator’s pipes, Markit provides the connectivity to DerivServ, the DTCC’s matching service for credit derivatives, says Bailey. However, Swapswire has not built connectivity to DerivServ, notes Bailey. Bailey says the deal positions Markit to offer connectivity to both Swapswire and DerivServ. “Their clients will be able to type trades into these two major utilities,” says Bailey.

Now that Swapswire will be part of market, it will make it easier for buy side firms to go to DerivServ or Swapswire because the connectivity will be provided through Markit, says Bailey. If this were to happen, PIMCO, which is a buy-side client of Markit’s workflow service, could do a trade and pump that to DerivServ (via Markit) and now they’ll own Swapswire, he says.

Source URL: http://www.wallstreetandtech.com/blog/archives/2007/12/market_to_acqui.html?cid=nl_wallstreettech_week
Publish date: December 05, 2007

Derivatives Processing Will Attract More Dollars, Attention in 2008

CHALLENGE: As OTC derivatives grow increasingly popular, accurate pricing and risk evaluation is more important than ever. Automating derivatives processing also will be a priority in 2008 -- not just for efficiency's sake, but also to help firms mitigate market volatility.

One of the biggest originators, Merrill Lynch, took a huge writeoff for its losses and ousted its CEO. "This summer certainly highlighted ... the complexity of dealing with products that are hard to value," Bailey notes. The need has never been greater for buy- and sell-side firms to invest in technology to keep their derivatives involvement as immune to market volatility as possible. Implementing analytics software that can help with better pricing and risk evaluation, and accurate and timely trade capture and processing, will be top priorities in 2008.

Where the Industry Is Now: As a result of the CDO fiasco, some of the work that had been going on to automate derivatives processing (particularly the DTCC's Deriv/Serv and Trade Information Warehouse for processing and storing derivatives contracts) suffered a setback, and attention shifted toward technology that helps price derivatives, assess their risk and capture trade details. At the SIBOS conference in October, delegates discussed the need to get to T+30 -- the ability to process derivatives within 30 days. "The OTC market has evolved in a very inefficient way, and we're trying to automate big parts of it," Bailey says.

Focus in 2008: Broker-dealers will continue to urge clients to use Deriv/SERV. However, some dealers still need to make sure their software can read and produce Financial products Markup Language (FpML) so that it speaks what is becoming the common language of derivatives. Buy-side firms will upgrade their technology, especially those that plan to invest more heavily in derivatives. Some will turn to outsourcing or hosted solutions so that they don't have to build in-house.

Industry Leaders: The so-called "Fed 14" -- the 14 broker-dealers that promised the Federal Reserve in 2005 they would remedy their derivatives processing backlogs of up to 90 days -- are probably the furthest along in derivatives automation.

Technology Providers: DTCC, SwapsWire, T-Zero, CreditMatch, Markit and Thomson Tradeweb all have been evolving their derivatives technology offerings. Several vendors, some new to the space, introduced derivatives processing offerings at SIBOS in October: Content management system vendor Interwoven launched DealConnect for DTCC, which lets buy-side firms and broker-dealers connect with the DTCC's Deriv/SERV Trade Information Warehouse; Wall Street Systems unveiled a hosted back-office clearing and settlement system; Document Sciences and Volante Technologies announced a partnership to automate the production and transmission of trade confirmations over a range of messaging systems; and Message Automation and City Networks launched Proactive Derivatives, a solution for automating post-trade management of OTC derivatives.

Software that enables model-based pricing, from vendors such as Numerix, Quantifi and Maplesoft, will be big this year as firms strive to bring more intelligence to their derivatives investments. Software that helps match documents between counterparties and handle the workflow of derivatives, such as Document Sciences' offering, also will be considered.

Price Tag: According to Bailey, dealers spent $610 million on IT just for credit derivatives in 2007. "There have been a lot of setbacks, but I see sell-side firms spending around $740 million on credit derivatives technology next year," he predicts.

Source URL: http://www.wallstreetandtech.com/showArticle.jhtml?articleID=204203549
Publish Date: November 26, 2007

Ucits III Drives Demand for Independent Valuation

Société Générale Securities Services (SGSS) has rolled out Xenomorph's TimeScape data management solution in response to mushrooming demand for more complex financial instruments among buy-side firms seeking independent valuation services.

Société Générale Securities Services (SGSS) has rolled out Xenomorph's TimeScape data management solution in response to mushrooming demand for more complex financial instruments among buy-side firms seeking independent valuation services.

SGSS has integrated the data management system in its derivatives operations support services, which the fund administrator offers to asset management clients in a five-year deal. The data management services provided by TimeScape, including the independent valuation of structured derivatives products and risk management support, are in demand as a result of the EU's Undertakings for Collective Investment in Transferable Securities III (Ucits III) directive. The pan-European legislation has extended the range of financial instruments in which funds are able to invest.

Rachid Lassoued, head of financial engineering at SGSS, says the firm last year witnessed "surging demand" for independent valuation services for complex derivatives products, chiefly among buy-side firms. Investment banks are also requesting the services for their insurance, corporate and fund management clients, says Lassoued.

"In the past, buy-side firms relied on the counterparty's valuation services in a trade. There was no independent check. Also, every time you have a crisis, there is an incentive for firms to go to independent valuation services," says Lassoued.

"The growth in more sophisticated financial instruments among buy side firms is the driver. More asset managers are using derivatives," says Xenomorph CEO Brian Sentance.

TimeScape's validation capabilities are also utilized to control and cleanse multiple sources of market and instrument data for use by other downstream systems.

SGSS began integrating the TimeScape solution earlier this spring with Summit, the fund administrator's front-to-back office system for derivatives. Officials from both parties decline to disclose the value of the deal.

Source URL: http://www.watersonline.com/public/showPage.html?page=printer_friendly&print=637354
Publish Date: 1 November, 2007

Thunderhead to automate FpML processing for OTC trades across SwiftNet

UK-based Thunderhead has signed a partnership agreement with financial industry network Swift aimed at simplifying OTC derivative post-trade processing across the SwiftNet platform via the use of industry standard FpML messaging.

Thunderhead says its ability to generate FpML (Financial products Markup Language) output - combined with its support for DTCC's Deriv/Serv's OTC derivatives matching service and trade information warehouse - enables Swift members to dramatically simplify the process of generating electronic trade confirmations and achieve automated trade matching.

The vendor's XML adapter for Deriv/SERV provides an interface that allows users to quickly define and generate accurate FpML messages for delivery across the Swift network.

"The combination of Swift's broad reach of network and services infrastructure, combined with Thunderhead's extensive support for creating and delivering FpML, speeds the deployment and implementation of FpML to both the buy-side and sell-side participants to improve operational efficiencies and reduce operating costs," says Glen Manchester, CEO of Thunderhead.

"The need to streamline the trade confirmation process and reduce operational risk across a vast spectrum of asset classes is increasing dramatically," adds Fabian Vandenreydt, head of broker dealer and pre-settlement services for Swift. "Thunderhead's experience in helping financial services firms manage STP in derivatives trading makes them a welcome addition to Swift's partner community."

Last year US investment bank Morgan Stanley implemented Thunderhead's document generation technology to help automate the creation of OTC derivative trade confirmations.

Source URL:http://www.finextra.com/fullstory.asp?id=17467

Publish Date:21 September, 2007

OTC Derivatives Face Post-Trade Challenges

What will it take to automate the post trade landscape?

By Mayiz Habbal

The OTC derivative environment is burdened by volumes of paper, spreadsheets and phone calls associated with deal tickets, deal contracts, legal contracts and counterparty management. Growth in the derivative market has outpaced operational capacity and expertise. The nature of derivatives is a high degree of processing interdependency among market participants and continual development of new structures, as well as a dynamic life cycle subject to external events, such as defaults and trade transfers. The challenge for money managers and broker-dealers is to automate processing. Potentially, the next five years will be a new era of collaboration and technological creation, and an amazing race in which the finish line is a win for all.

The trading world is filled with interdependencies and short time frames with efforts geared to affirmations within a few days of trade execution. Money managers need to advise brokers of trade allocations before broker confirmations can be sent out. Lack of affirmation from a counterparty can create an opportunity for downstream delays in accurate payment. Further, hedge funds work with multiple prime brokers in order to protect confidentiality and mitigate risk. There are instances of relatively small firms with $100 million in assets under management using three prime brokers. The trading and operational challenges multiply.

It is estimated that up to 30 percent of OTC derivative trade confirmations contain an error(s) and require subsequent handling for rebooking or amendment. Most OTC derivative trading is conducted by phone or fax. The operational nightmare of backlogs, errors and staffing shortages are a reality for many firms. Industry market participants and regulators alike are concerned. The cumulative costs of errors and the potential trade exposures are too huge to ignore, particularly in light of the mainstreaming of the derivative market and the increase in cross-border trading. The global regulatory agencies more and more are coordinating their efforts to enhance not only local market stability but also global stability in the financial markets.

According to a previous Celent report on European post-trade processing, "The majority of respondents indicated that less than 50 percent of derivatives processing is automated. The lack of STP in derivatives was mainly attributed to the complexity of transactions and lack of standards. As a result, 35 percent of respondents cited derivatives as the No. 1 priority for STP projects as opposed to other instrument classes."

Buy Side Slow to Automate

What's clear to brokers -- and to many in the technology sector that service the brokers -- is that the buy side is not shifting to the automation paradigm as actively as is needed. Firms may delay because there are few multisecurity systems, there may be additional costs or they do not feel their volumes justify an additional technology implementation.

The buy-side purchaser of technology for derivatives processing is still a rare bird. A quick count of the leading providers in this space not affiliated with an execution platform show about 1,000 hedge funds and asset manager clients. Lack of adoption reflects the still relatively young technology. The buy-side community still is coping with front-office trade automation and other technology priorities, such as compliance, risk analytics and portfolio management systems for investment of derivatives.

The market likely is waiting for further advancements in the field, as well as its own derivative volume to increase in order to justify the expenditure. Many are simply relying on whichever processes and tools the broker-dealers provide. Looking to a broker-dealer to provide support and to adapt operational procedures based upon what is free in the market is common.

Unlike the broker-dealer community, which has greater technology and financial resources, most buy-side firms prefer to purchase technology that is multifunctional, product-neutral and designed to handle any security type. Many of the vendor solutions today are geared to a single type of security. Since the broker-dealer community is behind much of system development and firms typically operate in a silo structure, single-security systems are not as burdensome. Buy-side firms will postpone a shift to new technology if they believe the vendor market is in transition and are willing to make trade-offs even if the result is more manual labor. If existing systems provide some element of support, all the better -- and all the longer the postponement.

Growth and Lack of Standards

The derivative world is simultaneously coping with a growth boom and the need for standard protocols and procedures with agreement from a myriad of market participants. The key drivers to change are the broker-dealer community and organizations such as ISDA, DTCC Deriv/Serv and the regulatory agencies, as well as very large traditional asset managers and hedge funds. It is a collaborative effort that will take time but is launched on the heels of success in credit derivatives.

The general lack of broad buy-side adoption of third-party solutions to automate the post-trade/pre-settlement environment is partly a measure of progress of these leading figures. A quick count of the number of buy-side clients on leading applications not affiliated with an execution platform is about 1,000 firms -- not high, considering the thousands of money managers worldwide that might be dabbling in unlisted derivatives. DTCC Deriv/Serv, a key vendor in the trade confirmation service, has approximately 800 investment firms, and that figure has exploded from three years ago. Deriv/Serv has gained the greatest penetration in the credit market, although not universally across OTC derivatives.

So what is delaying broad adoption by the buy-side firms? Are they not as encumbered in the OTC derivative processing dilemma as the broker community?

Outside of active hedge funds with sophisticated strategies and traditional money managers of very large funds, the overall trade volume for the bulk of firms may be considered too small to warrant additional budget for these software applications. Firms are content to cope with manual processes on small trading volumes. Others just rely on free services, such as prime broker-provided Web portals. Given the size and interdependency in the markets, it might well be time for the buy side to make a greater contribution to industry problems.

In buying technology, most asset managers prefer to choose from a variety of competitive solutions that handle multiple products versus a single type of OTC derivative. Few are eager to be the first to sign up for a new solution. The buy side often adopts a wait-and-see approach to optimize expenditures on a clear leader or to allow enough time for the technology to evolve a generation. Buy-side firms also look at vendor reputation, and in a new technology sector such as post-trade/pre-settlement, where change still is occurring, it takes time to validate credentials.

However, vendor options will grow -- and soon. The sector is a long way off from commoditization, regulators are collaborating globally, and the brokerage community is determined to make the pain go away.

Mayiz Habbal is managing director of the Securities & Investments Group at Celent and is based in the firm's New York office. His areas of research focus on enterprise architectures and aligning business strategy with IT initiatives. He brings with him more than 15 years of experience in the management and development of software and engineering of IT strategies, predominantly in the investment banking industry. Before joining Celent, Habbal held positions with Oracle Siebel, Bank of America and Dresdner Kleinwort.

Publish Date - July 30, 2007
Source URL: http://www.financetech.com/showArticle.jhtml?articleID=201201909

Technology Upgrades Improve Derivatives Processing

Derivatives Processing picks up speed thanks to tech upgrades at DTCC, SwapWire, major broker-dealers and custodians.

What a difference two years make. In October 2005 at the Institute of International Bankers Luncheon in New York City, Timothy Geithner, president of the Federal Reserve Bank of New York, expressed grave concerns about "the growth in volume and complexity of new instruments for risk transfer, which has advanced, as it typically does, ahead of improvements in the trade-processing infrastructure and risk management and control practices." Among other problems, he cited "the degree of manual processing required for trade capture and settlement, ... and the slow adoption of market services for automated processing."

Fast-forward to summer 2007, and derivatives processing is a slightly more automated world, especially credit derivatives -- contracts that transfer the risk of the total return on a credit asset falling below an agreed level without transfer of the underlying asset. An April 2007 report from the International Swaps and Derivatives Association (ISDA) found that outstanding credit derivatives trades fell from 16.2 days worth of business in 2006 to 5.5 today; interest rate derivatives were down to 14 days from 50. The survey also found that among large firms, more than 70 percent of credit derivatives confirmations are sent out T+1, up from 50 percent a year ago.

"Last year there was a lot of attention to credit derivatives because of the fast growth in that market and outside pressure from the Fed and [British regulatory body] FSA," explains Brad Bailey, senior analyst at Aite Group. "There was a considerable spend on technology and innovation by different vendors," including Calypso, Markit, T-Zero, Thunderhead and Interwoven, and the major dealers invested heavily in these upgraded solutions, he adds.

Further, the Depository Trust and Clearing Corp., the broker-dealer-owned clearing utility, built a trade information warehouse that stores a "golden copy" of every trade record that passes through its DerivSERV engine for matching and confirming credit derivative trades electronically. About 80 percent of all credit default swaps are matched and confirmed through DerivSERV. And another major utility, SwapsWire, now has 15 dealers and 30 interdealer brokers using its electronic confirmation service for equity derivatives.

In other developments, the Financial products Markup Language (FpML) -- an XML message standard for the over-the-counter derivatives industry -- is gaining traction as a universal language for derivative transactions. A novation protocol has been agreed upon for handling the reassignment of trades to new counterparties. And large broker-dealers and custodians, such as State Street, are rebuilding their derivatives processing platforms to accommodate new derivatives products.

Yet there's work to do before derivatives processing is completely automated. "Utilities like SwapsWire and DTCC are not keeping pace with the growth in new types of derivatives products coming out," says State Street SVP Neil Wright, who along with fellow SVP Kevin Sullivan was hired by the firm at the end of April to oversee ongoing development of its derivative-processing capabilities. For instance, while the DTCC addresses credit derivatives, commodity and equity derivatives are growing quickly and are not yet addressed by the DTCC's matching service or trade information warehouse, Wright notes.

Equity derivatives are likely to be the next area of focus. "Last September the Fed announced it will look at the equity derivative market, which is a very big, client-facing global market," Aite's Bailey says. "The industry expected this, and there's been a lot of cooperation among the dealers and ISDA working groups."

State Street's New Platform

One of the major difficulties with automating derivatives, State Street's Sullivan says, is handling the many data fields each contract requires. "In the exchange-traded securities world, you might have five pieces of data on equity trades or bond trades, and it's always the same five or six pieces of data. So you can build a system around that assumption," he explains. "But in the derivatives world you might have over 100 pieces of data from a universe of about 10,000 that can exist. It's difficult to build a framework that can handle new products as they emerge quickly because the number of fields that are available is so much greater."

Sullivan and Wright are building a new asset-servicing platform to provide middle- and back-office accounting. They're constructing a service-oriented architecture into which they will plug third-party software and proprietary tools. "There's no one product on the market that can meet the needs of an asset-servicing organization the size of State Street," Sullivan notes.

The framework will accept data feeds from DTCC and SwapsWire and validate trades via the DTCC's trade information warehouse. "The industry has accepted that the DTCC's trade data warehouse view of the trade is, in fact, what they call the golden copy," Wright says. "If there's any dispute, those are the terms of the transaction that both parties have agreed to."

The new platform will make heavy use of FpML. "It provides a single dictionary for the 10,000 fields that are used in derivatives," Sullivan says. "Because everybody understands what those 10,000 fields mean, the confusion that can occur is reduced." The initial rollout of the platform -- which will accept trades in any format and convert them to FpML -- later this summer will cover all products that use FpML today, Sullivan adds, noting that the firm will be able to service new types of derivatives products as soon as they can be represented by an FpML message.

DTCC Update

DTCC launched its trade data warehouse for credit derivatives in November; all trades matched in DerivSERV are stored there automatically. These records should ease post-trade contract maintenance and result in fewer disputes, according to Janet Wynn, managing director of DTCC. All parties reconcile with the warehouse rather than with multiple dealers, which helps with portfolio margining and risk management, she explains.

The next step for the trade information warehouse is "backloading" -- getting pre-November 2006 portfolios into the warehouse. "The largest firms have the bulk of the portfolios," says Wynn. The so-called Fed 14 (the 14 major broker-dealers the Fed asked in 2005 to reduce credit derivatives backlogs) have backloaded most of their contracts; others have started. "We expect to be backloading through early next year," Wynn says.

The trade information warehouse will help DTCC automate quarterly settlements processing, Wynn continues. Credit derivatives contracts have payment obligations every quarter. In February, DTCC began work on automatically calculating these payments for single names and index trades, which Wynn says is 85 percent of the market. "We're going through a long trial period where we're showing people what the calculations would be, and they're comparing them to their own risk calculations," she says, adding that in November DTCC plans to offer straight-through processing for these quarterly payments.

DTCC also is testing and hopes to roll out by summer's end a trade information warehouse feature that lets users record a credit event, such as a company's bankruptcy or merger. "Right now if there is a credit event, people have to notify each other that an event has happened and which contracts are subject to it," Wynn reports. "Using our system, people will be able to flag an event and note which contracts are impacted." Not only would the noting of credit events help with calculating quarterly payments, it should help address the concern of regulators, such as the Fed, that the market may be ill-equipped to handle major credit events.

To use the new DTCC features, custodians and larger dealers are updating their systems. But, Wynn points out, small firms don't need to worry. "Folks that are small can just use spreadsheets for input and output," she says. "We're trying to work with them on getting an automated feed to their service provider."

Further down the road, the DTCC will work on automated processing and a warehouse for other types of derivatives, such as equity derivatives. "A small percentage of the equities market is confirmed electronically right now, so our focus at the moment is getting those transactions confirmed electronically," Wynn relates. "To drive forward automation here, we have to get a lot of participation from the buy side and across hundreds of second- and third-tier banks, because every bank in the world uses interest rate derivatives for asset/liability management."

Publish Date: Jun 18, 2007
Source URL: http://www.wallstreetandtech.com/showArticle.jhtml?articleID=199903414

PolarLake releases OTC derivatives trade lifecycle package

PolarLake has today launched a fully packaged over-the-counter derivatives trade lifecycle solution.

The solution is ideal for sell-side, buy-side, custodians and fund administrators.

Features of the solution are:

• ISDA compatible portfolio reconciliation, matching and reporting service, including out of the box reports for business users
• Support for FpML 4.2 & 4.3 standards
• Out of the box FpML semantic validation of the business meaning of trade data
• Ability to take inputs in any format (Excel, pdf, CSV, XML, etc.)
• Out of the box BPM support for trade lifecycle and exception management
• Data Analyst driven user desktop for configuring business rules
• Support for all derivative classes
• Out of the box integration with WS-CDL for choreography of trade flows
• Integration platform for connecting to SwapsWire, T-Zero, DTCC
• Easy integration solution for FpML onto SWIFTNet
• Business rules defined in open standards rule language XQuery

The key benefits to financial institutions of adopting PolarLake's OTC derivatives trade lifecycle solution are:

• Decreased costs and lower operational risk through automation of existing manual portfolio reconciliation processes
• Increased revenue through tailored, differentiated OTC derivatives trade services to clients
• Lower cost of integration over traditional coding of transformations
• Lower cost of maintenance based on PolarLake's ability to manage the complexity of FpML in an intuitive data centric manner
• Quicker on-boarding of new services such as SwapsWire and T-Zero

Commenting on the release, PolarLake CEO John Randles said, "PolarLake has been involved in the integration, reconciliation and process management of FpML based trades for many years. Our core platform is more suited to this problem than any other on the market due to our patented XML pipelining technology. And, with our experience in many implementations with companies like JPMorgan, Société Générale, Pioneer Investments and Dimensional Fund Advisors, we have been able to package a complete integration, reconciliation, matching and BPM solution for the OTC Derivatives market. Companies new to these asset classes are looking for solutions, not a series of technical problems. Companies already working with these asset classes are well aware of the technical and operational problems, currently addressed by expensive manual processes. These are problems we have already solved."

Publish date:July 23, 2007

Source URL:http://www.finextra.com/fullpr.asp?id=16240

Barclays and BBH exchanges FpML messages over SwiftNet

Swift announced today that Barclays Global Investors and Brown Brothers Harriman were the first asset manager and custodian to exchange FpML (Financial products Markup Language) based Contract Notifications over SWIFNet.

The following week, State Street on behalf of PIMCO and other customers began testing FpML communication with Bank of New York, Mellon Bank, Northern Trust and State Street Corporation.
SWIFT has launched the SWIFTNet FpML programme, in cooperation with ISDA (the International Swaps and Derivatives Association) earlier this year. This initiative seeks to automate OTC derivative post-trade processing. By using SWIFTNet FpML the industry players will be able to manage the rapidly growing volumes in the OTC derivatives market in a more efficient way.

"Our successful test is evidence of Brown Brothers Harriman's commitment to improving STP and reducing risk for our clients' derivatives activity," said Cherie Graham, Head of Brown Brothers Harriman's Derivatives Product Group. "We are excited to play a key role in helping the industry move forward with making derivative trade automation a reality through the FpML format."

Steve Goswell, Director, Barclays Global Investors, a strong advocate for automation and standardisation in the asset management community, said, "Barclays Global Investors is building a strategic platform to support the growth in OTC derivative volumes. With the help of SWIFT we have a global, secure, and reliable transport mechanism."

"This industry initiative will become an additional vehicle for improving the STP handling of OTC derivatives and help to mitigate the settlement risk for these products," said Terry Randall, senior vice president of State Street Corporation.

The first phase of SWIFTNet FpML involves transporting contract notification messages between asset managers and custodians. Later phases involve additional market participants, such as dealers and additional services, including trade confirmations and portfolio statements.

"This initiative brings the industrial strength and reach of SWIFTNet to the OTC Derivatives processing area, complementing our existing post-trade messaging services for the FX, equities and fixed income spaces," said Fabian Vandenreydt, Acting Head, Securities Industry Division, SWIFT.

Source URL - http://finextra.com/fullpr.asp?id=16055
Published Date - July 07, 2007

Germany Jumps at Derivatives

New regulations open opportunities, but strict risk management rules force asset managers to overhaul their front offices.

For the first time, fund managers in Germany are taking on a wider variety of derivatives to boost investment returns, but stringent new risk management guidelines call for radically revamping front-office systems, which could delay the launch of funds that comply with the regulations.

Financial regulators in Germany have always viewed derivatives with a cautious eye. While securities regulator Bafin does not share the view of investment guru Warren Buffet—who famously described the instruments as "financial weapons of mass destruction"—it had until recently only allowed asset managers in Germany to invest in derivatives to hedge risk exposure within their portfolios.

This all changed with the introduction of the Derivatives Regulation (Derivateverordnung) in February 2004, which came into force in conjunction with the Investmentgesetz (InvG) legislation. The Derivatives Regulation allows fund managers to invest in the full spectrum of derivatives products. But to do so they must obey strict risk management rules, which place limits on market risk and counterparty risk and require fund managers to install management and control systems in the front office to monitor the increased risks associated with derivatives. The funds had an adjustment period, which lasted until February this year.

Philippe Carrel, global head of alternative investments at Reuters in New York, says asset managers in Germany have "jumped at the chance" to begin updating their front-office risk management systems to comply with the rules.

Carrel says increasing pan-European competition in the asset management industry has given German fund managers a strong incentive to offer their institutional clients the opportunity to invest in derivatives and structured products. The European Union's Undertakings for Collective Investment in Transferable Securities (Ucits) III directive has extended the range of financial instruments in which funds are able to invest and introduces a "European passport" system to facilitate cross-border activity within the European Union. This opens up opportunities for hedge funds and asset management firms based outside Germany to vie for market share with the country's leading fund managers.

"This [Ucits III] is a new deal," Carrel says. "You are going to see old business models going out of the window and new business models starting to flourish. A passport-free Europe is becoming a reality. If you are an asset management firm that does not offer German investors market-neutral funds [which contain derivatives], someone else will do it."

Risk Control

Frankfurt-based Metzler Investment built a new risk control department to comply with the Derivatives Regulation in early 2006, using a risk management system developed by RiskMetrics. The Frankfurt-based asset manager, which has €30 million ($40 million) under management in a variety of equity and corporate bond funds, took a year and a half to make the risk and control department fully operational.

"Before the derivatives rules we did not need to carry out value-at-risk (VaR) calculations. Now we have to monitor the quality of VaR calculations on a daily basis through back-testing," says Ruth Boettcher, head of risk management at Metzler Investment.
Metzler's risk control department is split into various teams. The original risk management team, which consists of three people, carries out VaR calculations and stress-tests the portfolio. This involves the use of historical simulations and Monte Carlo simulations. The risk team works alongside a data management team, which consists of three people, and a legal and compliance team comprising four people.

"You have to develop all the interfaces to internal systems—it was hard work," says Boettcher. "If you have a new product, you have to route it from the back to front office and into the risk management system to make sure [it is compliant with the regulations]. We have a big IT team and we are working every day on the interfaces because we need a lot of automation in order to avoid manual processes."

In addition to carrying out daily VaR calculations on investment portfolios, fund managers have to obey strict rules on pre- and post-trade transactions to ensure they do not fall outside the regulations. Front-office systems must monitor a fund's exposure to individual stocks and share-price indexes, currencies, and bond issuer and counterparty credit risk. Asset management software company Aquin Group and financial services software provider Charles River Development are among the vendors helping German fund managers comply with these rules.

Aquin Group has installed its MIG21 Global Investment Compliance system at several major asset management firms in Germany, including DWS, a subsidiary of Deutsche Bank, Union Investment, Allianz DIT and Com Invest.

Charles River has installed its Investment Management System (IMS) at six institutional and retail asset managers in Germany. Siegfried Huegemann, senior account implementation manager at Charles River, says the IMS—which incorporates n-tier service-oriented architecture to support front- and middle-office systems—enables vendors to meet three sets of compliance rules: legal and regulatory rules laid down by Bafin, contractual or mandate rules dictated by a client, and internal rules based on a fund manager's asset allocation models.

"The Derivatives Regulation sits between two components of risk—first and foremost the credit risk, and also market risk," Huegemann explains. "If you have a serious violation, you have to report it to Bafin. Quite often, asset managers have to manage as many as 25 different portfolios and they are not sure if they do comply with the regulations or not. Our system checks against a fund manager's account positions and lets the company know if an order violates the regulation's compliance rules."

Huegemann declines to name the asset management firms that have incorporated the IMS software into their systems, but he uses the example of a fund manager investing in exchangeable bonds to demonstrate how the system works. "Asset managers have to consider both market and credit risk. A fund could have a 10 percent limit on the value it can invest in a single issuer within its portfolio, such as Daimler Chrysler. This limit is dictated by the regulatory rules," he says..

"If the firm already has an 8 percent stake in Daimler Chrysler, it may wish to buy an exchangeable bond issued by BMW that can be exchanged against shares of Daimler Chrysler. The details of the BMW bond and the exchange rate can then be input into Charles River's IMS, enabling the asset management company to control the total issuer concentration of Daimler Chrysler. This enables it to avoid violating the InvG rules limiting exposure to a single issuer to 10 percent. The asset manager can increase the issuer concentration of Daimler Chrysler by an additional 2 percent only."

Huegemann says IMS can be adapted to meet the specific needs of an asset management firm, which may obtain trading data and instrument data from a variety of providers such as Reuters or Bloomberg. "We can adjust to the client's environment and integrate with it accordingly. To that end, we can also do pre- and post-trade compliance according to a predefined set of rules for particular security types, regardless of the data set. Without such an open system, it would be challenging to change predefined compliance rules when the regulatory landscape changes," he says.

However, Reuters' Carrel says German fund managers' primary challenge is integrating risk management processes into their internal and external systems. "Ensuring connectivity with order management systems, order routing, prime brokers and different execution venues is critical. Today, fund managers have systems for exchange-traded products that need to be updated to account for over-the-counter derivatives instruments as well. It is not just a case of buying a system and getting into a trade. You have to be able to aggregate risk and valuations. There is the control of static data. You have to change the workflow to have a single view of OTC and exchange trades in one place," he says.

Carrel expects these technical obstacles to hamper German firms' ability to launch funds containing derivatives. "It will be a struggle to start off with this year. Typically, firms get into a business, see the issues and then update systems and workflow. It is usually a much more reactive process," he says.

Source - http://www.watersonline.com/public/showPage.html?page=457147
Publish Date - July 1, 2007

Credit Markets Eye Automation

Industry leaders who attended a market summit on over-the-counter (OTC) derivatives operations in London are urging major credit derivatives dealers to band together and form a central clearing agent to clean up a market where regulators want to see transaction processing become more automated.

The service could be based upon a structure similar to SwapClear, which was launched in September 1999 by London-based clearinghouse LCH.Clearnet to provide clearing for plain vanilla OTC interest rate swaps, according to the panel of three senior representatives from the buy side and sell side and an industry clearing and settlement service.

"Any one of the major prime brokers [in the credit derivatives market] could take that leap of faith and suggest operating a clearing house," says Chris Bentley, head of operations at London-based hedge fund Cairn Capital, which manages portfolios worth $30 billion. "This could potentially be done just for their clients to start off with and if this started a precedent, others may join to form a consortium of banks operating the system. This will reduce the logistics of confirmation matching payments. You would give all your trades to the clearinghouse and match them off," he adds.

Major dealers in the credit derivatives market—which include Bank of America, Citi, Goldman Sachs and JPMorgan—have already taken steps to make transaction processing more automated, such as confirming a higher percentage of trades electronically and adopting new functionality from electronic clearing and settlement firms such as the New York-based Depository Trust & Clearing Corp. (DTCC).

The big backlog in unconfirmed trades in the credit derivatives market—which stemmed from manual processes at banks with some dealers still using pieces of paper to register trades—first fell under regulatory scrutiny in September 2005 when Timothy Geithner, president of the Federal Reserve Bank of New York, spearheaded a drive to clean up the backoffice processes of 14 of the largest dealers in the market. The 14 banks have since reduced backlogs on outstanding confirmations by more than 80 percent.

However, Val Wotton, vice president, equity derivative and structured products documentation at Citigroup, points out that investment firms will face further technical challenges if they are to integrate their trade processing systems with an external clearing agent.

"There are issues around matching workflow and your internal workflow management. How do you actually internally control your documents and your payments and then leading on from there, how do you then process them to an industry client solution such as one provided by SwapClear. There are also questions around how you link back into your internal systems and close the loop," says Wotton.

New York-based electronic brokerage Creditex's credit derivatives trade processing platform T-Zero—which offers market participants a messaging system for the electronic affirmation of credit default swap trades—was also suggested by the summit panel as a possible centralized clearing agent in the future.

However, Bill Hodgson, first vice president derivatives services at the DTCC, says the fragmented buy-side market presents a challenge to the development of "focused" buy-side services. "It is not hard to build a platform. Getting people to use it is a different matter," he says.

"An integrated approach needs 300 buy-side firms to come to the table. Unless there is some form of an industry forum for the buy side [to express their view] we are not going to have that," says Bentley.

Hodgson says the exchange and cash markets have taken decades to formulate integrated trade processing systems. "Generally, firms buy solutions that plug into their food chain. In derivatives, SwapClear and T-Zero have bits of the food chain. Even though we are working quickly on the trade information warehouse for credit, I think it will be quite some years before you see a mature and comprehensive global settlement solution that is integrated across all OTC asset classes by one provider," he says.

Meanwhile, global regulators continue to monitor the infrastructure used by major industry dealers to process equity, interest rate and commodity derivatives. The New York Fed announced in May that 18 major market participants in the equity derivatives market had made progress in automating post-trade processing infrastructure. Dealers have succeeded in reducing equity derivatives confirmation backlogs by 25 percent in the period from November 2006 to Jan. 31 of this year.

Source - http://www.watersonline.com/public/showPage.html?page=457137
Publish date - July 1, 2007

Northern Trust expands OTC derivatives trading services

Northern Trust has expanded its services for over-the-counter (OTC) derivatives trading to include independent valuation of a comprehensive array of derivatives for its custody, fund administration and investment operations outsourcing clients.

The automated solution links to third-party specialist providers of OTC derivatives valuations and utilizes a system of tolerance checks to arrive at optimum pricing and performance measurement for the complex financial instruments.

"Independent valuation has become a crucial piece of the derivatives puzzle as institutional investors seek portfolio transparency to meet internal risk and compliance goals, as well as emerging regulation and industry best practices," said Judson Baker, product manager for derivatives processing related services at Northern Trust. "For our 'best of breed' approach, Northern Trust has selected independent pricing firms specializing in a range of swaps and options. Each provider has an extensive history in running market-standard valuation models, and Northern Trust brings them together in a cost-effective solution with coverage across broad product types."

In addition to independent valuation, Northern Trust's derivatives processing initiative includes automated collateral management for OTC derivatives trades under International Swaps and Derivatives Association (ISDA) master agreements. The suite of services, integrated with Northern Trust's global infrastructure, provides end-to-end processing including calculation of exposures, making and receiving of collateral calls, managing collateral according to the terms of the credit support agreement, legal agreement documentation management, reconciliation and settlement.

"As volumes and product complexity in OTC derivatives continue to grow, so too do demands for independent valuations and greater transparency around these asset types," said Stephen Andress, global head of derivatives operations. "Northern Trust is continuously working to enhance its processing capabilities for derivatives, allowing our clients to create a tailored service solution that integrates foreign exchange, cash management, derivatives clearing and other complementary services to support their diverse investment strategies."

Publish Date: June 28, 2007

Source URL:http://www.finextra.com/fullpr.asp?id=15844

The subprime meltdown, continued - Bearish turns

American shares and bonds wobbled as two hedge funds managed by Bear Stearns came close to collapse after suffering heavy losses in the subprime mortgage market.

Read the full article at Economist.com - http://www.economist.com/printedition/displaystory.cfm?story_id=9378742

Publish Date: June 21, 2007
Source: The Economist

Bear, Goldman and Lehman sign up to Markit OTC affirmation service

Markit, a provider of independent data, portfolio valuations and OTC derivatives trade processing, has launched a new electronic affirmation service within Markit Trade Processing (MTP). The first dealers to sign up are Bear Stearns, Goldman Sachs and Lehman Brothers.

The new service, which builds on Markit's existing affirmation model, is unique in its ability to electronically match trades between counterparties prior to confirmation. Alternative vendor affirmation solutions simply provide a connectivity mechanism that routes information between sell-side and buy-side firms.

MTP allows clients to reduce risk by automating the post-trade lifecycle for all OTC derivative instruments. Last month alone, the service processed in excess of 60,000 trades. MTP provides trade date affirmation and trade confirmation through industry utilities such as the Depository Trust & Clearing Corporation (DTCC). Markit sends more trades to the DTCC's Deriv/SERV platform than any other service provider.

Markit's platform also supports non-STP (Straight Through Processing) workflow, enabling clients to process paper confirmations in an automated, streamlined manner. This is particularly useful for processing equity derivatives which are likely to remain a hybrid environment of paper and electronic confirmation methods.

The launch of Markit's cross-asset electronic matching service coincides with a surge in demand for equity derivative processing solutions to tackle the backlogs building up in the asset class. A letter sent by the New York Federal Reserve to major market participants in May this year stated that "there remain significant challenges to automating the equity derivatives infrastructure…Additionally, dealers have not maintained the backlog reduction levels achieved in January 2007."

"As the derivatives market continues to grow substantially in both volume and complexity, our challenges associated with manual processing have also grown," stated Terrance Berland, Senior Managing Director at Bear Stearns. "We are quite excited about the potential that Markit's trade processing platform provides us to address these challenges across credit, rates and equities."

"The OTC derivatives markets continue to grow, and market particeet participants are very aware of the need for automation to achieve operational efficiency. Goldman Sachs and its clients require trade processing services that handle all types of OTC derivatives, including new instruments such as ABCDS and LCDS, seamlessly. We have very rigorous controls and processes, and chose Markit's trade processing service because it is the most comprehensive solution in the marketplace today," noted Bradford S. Levy, Managing Director at Goldman Sachs.

Jeff Gooch, Executive Vice President and Head of Processing and Valuations at Markit, said: "Having launched an affirmation service that connected counterparties twelve months ago, it became clear that funds and dealers operate in many different ways. Markit has therefore launched a new version of the service which is the first of its kind, allowing complete flexibility to cater for an institution's preferred operating method. By offering electronic matching prior to confirmation in addition to more traditional affirmation models, we enable our clients to meet their needs in equities, credit and rates, including meeting the new Fed targets for equity derivatives."

Publish Date: June 26, 2007
Source URL: http://www.finextra.com/fullpr.asp?id=15664

Celent - OTC derivatives to reach USD550trn by 2008

Over-the-counter derivatives will exceed the USD550trn mark in 2008, up from USD375trn at the end of 2006, according to a new report from Celent, a research and consulting firm that focuses on the application of information technology in the global financial services industry.

Growing OTC derivatives trading volume, escalating exposure to OTC derivatives and structured deals, the increased complexity of products and lack of trade automation have increased the importance of accurate valuation, according to the report, entitled Risk and Pricing Analytics: Addressing Valuation Challenges in OTC and Structured Products.

Recent losses suffered by Amaranth Advisors and Bank of Montreal illustrate the risks associated with the use of derivative instruments, according to Celent, and bring to light the need to address inappropriate valuation practices and insufficient management oversight.

The report says pricing and valuation of financial assets are core to a financial institution's existence and tied to the stability of the financial sector as a whole, and therefore getting it right is crucial.

'As a whole, the determination of fair market value for the positions that make up a complex trade, fund, or portfolio is, more often than not, fraught with complications,' says Celent analyst Cubillas Ding, the author of the report. 'Complexities often arise from multi-layered product valuation requirements, the fault-prone use of spreadsheets, and the transparency of valuation processes.'

To address this situation, he says, vendors have adopted different 'routes to market' for pricing analytics. Solutions are differentiated along several lines: specialised versus mixed asset models, coverage across various parts of the OTC and structuring lifestyle, scope of vendors' analytics, and the quality of partnerships related to market data, integrated trading, and risk management systems.

Ding says that institutions implementing pricing solutions need to weigh the level of granularity required for their OTC derivatives and structured products valuation activities, the type and nature of users, and time-to-market considerations in the context of the availability of internal resources. 'Each approach trades off granularity, end-user focus, and time to market,' he says.

Publish Date: June 11, 2007
Source URL:http://www.hedgeweek.com/articles/detail.jsp?content_id=112472

Unexpected Surge in Trading Volumes and Volatility Raises Infrastructure Concerns for Hedge Funds

In the wake of the rising volumes, computer glitches and capacity shortages experienced during the market's brutal decline in late February, hedge funds are reevaluating their systems and capacity needs, according to several industry consultants and IT service providers. After Feb. 27, when the stock market dropped 416 points and there were market data lags at Dow Jones & Company and slowdowns at the New York Stock Exchange, it's not surprising that hedge funds are reviewing their infrastructures to ensure they can perform in a more-volatile market.

Consultants and service providers say most large hedge funds were not impacted by the volatility in late February in terms of executing their orders and getting back position reports. "Larger firms that have invested in technology and operations have a robust technology infrastructure," says Jayesh Punater, CEO of Gravitas Technology, an IT services firm in New York that provides consulting, software development and systems integration for the alternative investment community. "Not only were they better able to cope with the market [decline], they were able to cope with market dynamics."

Still, hedge funds are concerned about their applications and the capacity of their infrastructures to withstand heavy trading volumes, say sources. "On a macro-level it definitely pushed people [who rely on automated trading] to look at capacity not only within infrastructure, but sustaining speed when capacity gets pushed," says Greg Treacy, director of U.S. sales at Neonet, an agency broker that provides direct-market-access trading to hedge funds and other buy-side firms.

Business as Usual?

Even prior to the recent market volatility, hedge funds that attract investments from institutional investors were focusing on business continuity and disaster recovery (see related article, page 21). "When volatility strikes, you can feel the tension around making sure the operations are up and running," says Jim Loy, managing director at Gravitas. "There's definitely a link between volatility and the business continuity and disaster recovery curve."

Now hedge funds also are looking to beef up the real-time applications that generate reports on the funds' current investments and power their ability to perform "what if" scenario analysis on their holdings. These tools can be "nicely integrated with accounting systems and OMSs [order management systems] to allow the portfolio manager to make decisions," Gravitas' Punater says.

Some funds are setting up internal data warehouses so that they can generate their own reporting infrastructure and look at risk across portfolios, adds Loy, who previously was head of infrastructure at Tiger Management, a leading hedge fund in the late 1990s, and subsequently worked in Morgan Stanley's prime brokerage business. "It truly simplifies the job of the operations departments as to what's the overall P&L for the firm, and there's attribution to different portfolio managers," Loy says. "It also gives hedge funds control over their data without being locked into canned reports," he explains. "You're not beholden to a vendor and you can slice and dice your data."

Another area of concern is the back-office "plumbing," such as making sure "the Microsoft applications and the e-mail and business continuity are robust so they are able to deal with huge volumes in trading," adds Gravitas' Punater. As hedge funds grow larger and they expand into multiple strategies and products, they are finding that their back offices have not kept up with their rapid growth in assets, he explains. In particular, hedge funds are focusing on accounting and back-office processing of trades, Punater observes, noting that investors also are demanding that funds have robust back-office recovery plans. In addition, "[Funds] are also having a hard time getting the data to the portfolio managers," the Gravitas CEO asserts. "They may need to reengineer or re-architect their operations."

Small Firms, Big Problems

Small hedge funds, which comprise the bulk of the industry, have the most issues to deal with, as most have not invested in robust systems and could be running their positions and reconciling trades in spreadsheets, warn industry consultants and vendors. Out of the total universe of 9,000 hedge funds (or 13,000, as some studies report), there are only about 400 or 500 that have robust infrastructures, estimates Sameer Shalaby, CEO at Paladyne Systems, a provider of a hosted front-to-back-office technology for the hedge fund community. "The bulk of the market has little or no technology infrastructure," he contends.

Typically, only funds with $1 billion or more in assets can afford a strong infrastructure, according to Shalaby. They don't get to be a multibillion-dollar fund without investing in infrastructure, as institutional investors require this as part of the due-diligence process, he notes.

But the bulk of the industry's assets are in the smaller hedge funds that can't afford to build their own infrastructures, Shalaby continues, and these funds may "start cutting corners" by doing some things on spreadsheets, or wait until next year to invest in an accounting system or order management system. "They'll definitely cut corners to manage costs until they have capital to deploy the infrastructure," Shalaby says.

But having the right risk-management systems in place is critical, particularly during volatile trading periods. "You can't fly a plane without radar, and in trading, some of these players have hundreds if not thousands of positions, and if you don't have a good risk-management system, you don't know what you're risks are," says Steven Harrison, president and COO of Imagine Software, which offers Derivatives.com, a real-time hosted risk management system that aggregates positions from multiple prime brokers.

To tap functionality they otherwise may not be able to afford, most of these smaller hedge funds rely on their prime brokers to supply their technology, which usually includes connectivity to execution venues, market data and software to manage their positions. But, "The moment the hedge fund adds a second prime broker, it finds out the technology that one prime broker provides cannot aggregate the positions of the second prime broker," relates Gravitas' Punater. While some prime brokers offer a service to aggregate the data from the other primes, it's not in the interest of the hedge fund to let one prime broker see all of its positions and risk revealing its proprietary strategies, which is why the fund has multiple prime brokers in the first place, he notes. But if hedge funds can't consolidate all of their positions, they may not be aware of their overall risk, Punater stresses. Clearly, this could raise risks for the fund's clients, he adds.

A Little Help, Please

Rather than face these IT infrastructure challenges on their own, many hedge funds are turning to solution providers that can offer an integrated hosted infrastructure with all the components that the hedge fund needs as well as sufficient backup capabilities. "The idea is to supply a hedge fund with all the technology it needs to run its business, taking care of redundancy, disaster recovery requirements and all the connectivity to markets," says Paladyne's Shalaby. For its hedge fund OMS, Paladyne partners with other vendors, including NYFIX for order routing and market connectivity, Reuters for market data, and Advent's Geneva for derivatives accounting. "Our clients could frankly trade from an Internet cafe if they had to access their portfolios," Shalaby contends.

Such bullet-proof capabilities are becoming a competitive differentiator for hedge funds. According to Shalaby, one reason hedge funds are reacting to the recent market turbulence is that they are facing scrutiny from institutional investors that are asking about the resiliency of the funds' infrastructures and how they performed under previous emergencies, such as 9/11. "These are now becoming standard due-diligence questions," Shalaby says. "If you were down and you're competitor was up, then guess what, I'd rather invest with your competitor."

Publish Date:Apr 30, 2007
Source URL: http://www.wallstreetandtech.com/showArticle.jhtml?articleID=199200266

WS&T News - Wall Street and DTCC Bring Derivatives Processing into 20th Century

At the SIFMA show today, Frank De Maria, global head of derivative client services and operations at Merrill Lynch, offered an interesting quote from Alan Greenspan, made six weeks ago: “I was shocked to find credit derivatives speculation and clearing operated with 19th century technology.” He was talking about trades being handled by phone, fax and paper. De Maria then Googled other 19th century inventions and found the stapler, barbed wire, dynamite and the zipper among them. Point being, it's time for modernization. Merrill Lynch and 13 other Wall Street firms have been working with the DTCC to build a data warehouse for derivatives, such that all derivatives trading data are in one place and there's one "golden copy" of every trade record.

"There will still be fails, but you will know the source of every fail," De Maria says. "You can proactively manage a fail, where today it's reactive."

So far, 850 firms are participating in the data warehouse, which is called Deriv/SERV. That includes 500 hedge funds, 150 asset managers and one custodian, according to Janet Wynn, managing director of the DTCC. "We will run heavy user acceptance tests this year," she says.
The DTCC also hopes to add other types of instruments to the warehouse as well.

In a separate session, Noland Cheng, managing director of Morgan Stanley and chairman of SIFMA's operations committee, said the committee is working to build an industry data warehouse that will combine records processing for different types of investments, reduce overhead effort for a lot of firms, and help regulators perceive the industry as efficient.

Publish Date: May 03, 2007
Source URL: http://www.wallstreetandtech.com/blog/archives/2007/04/wall_street_and.html

State Street Strengthens Derivative Servicing Capabilities

Industry Veterans Kevin Sullivan and Neil Wright Join State Street To Focus on Further Developing Derivative Processing Solutions

State Street Corporation (NYSE: STT), the world’s leading provider of financial services to institutional investors, today announced the appointments of Kevin Sullivan and Neil Wright to senior vice presidents with responsibility for overseeing the ongoing development of State Street’s derivative processing capabilities.

Sullivan co-founded Eagle Investments Systems in 1989. The company was acquired by Mellon Financial in 2001, and Sullivan remained to serve as Eagle’s chief technology officer up until 2006. As a product specialist at State Street, Sullivan will be responsible for building the technology infrastructure to support the company’s derivative processing.

Wright joined State Street from Citigroup where he was a director of derivative operations.
Prior to this role, he was senior vice president of asset manager solutions for JPMorgan Chase. As a product expert, he will be responsible for developing strategies to support State Street’s derivative servicing capabilities working closely with the business leaders, derivative specialists and information technology teams.

“These two industry veterans have devoted a considerable portion of their respective careers to developing the most sophisticated derivative processing capabilities,” said Joseph Antonellis, vice chairman, chief information officer and head of State Street’s North American investor services business. “Staying ahead of industry trends and automating the derivative servicing process will be key challenges for service providers. We are delighted to add the extensive experience that Kevin and Neil will bring to our teams and to the development of a derivatives center of excellence.”

Sullivan and Wright will further build on State Street’s derivative servicing capabilities for its customers who are increasingly using derivative instruments as investment tools in their portfolios.

State Street Corporation (NYSE: STT) is the world's leading provider of financial services to institutional investors including investment servicing, investment management and investment research and trading. With $12.3 trillion in assets under custody and $1.8 trillion in assets under management at March 31, 2007, State Street operates in 26 countries and more than 100 geographic markets worldwide. For more information, visit State Street’s web site at www.statestreet.com.

Publish Date: April 19, 2007
Source: Business Wire

Credit Derivatives - At the risky end of finance

The use of credit derivatives has boomed and bemused. These new financial instruments have yet to face their biggest test.

Read the complete article at - http://economist.com/business/displaystory.cfm?story_id=9033348

Publish Date:19-April-2007
Source:The Economist

Isda trumpets progress in credit derivatives while regulators sound alarm

Strong progress has been made in speeding up post-trade processing and cutting the backlog of outstanding confirmations in the fast growing credit and equity derivatives markets, says the International Swaps and Derivatives Association (ISDA).

Post-trade processing of privately negotiated derivatives transactions continues to significantly improve, says Isda, with dealers reducing levels of outstanding confirmations across the asset classes.

Isda's benchmark survey shows the time it takes to process credit derivative trades has fallen to 5.5 days, compared with 16.2 days in 2006, and there has been a reduction to 14 from 50 days for rates products.

Equity levels have fallen to 21 days from around 50, while commodities stand at 7.5 days compared to 23.3 days a year ago.

Among the large firms, over 70% of credit derivatives confirmations are sent out by T+1, up from 50% a year ago.

Commenting on the figures, Robert Pickel, executive director and chief executive officer, Isda, says: "Against a backdrop of robust growth in our business, the industry continues to make real progress in strengthening its operational infrastructure and reducing risk."

But speaking at Isda's annual meeting Jean-Claude Trichet, president of the European Central Bank, called for further market action to improve transparency in global credit derivatives sector and warned that financial markets may have become "excessively complacent".

Reflecting the concerns of regulators worldwide, Trichet warned that credit derivative instruments had not yet been properly "stress-tested", observing that some aggressive investors seemed to display a cavalier risk-­taking attitude even while their balance sheets were not necessarily resilient enough to handle shocks.

Publish Date:19-April-2007
Source:http://finextra.com/fullstory.asp?id=16822

Spending on OTC derivatives IT to hit $1.3bn in 2011 - TowerGroup

Spending on OTC derivatives trading technology by institutional brokers will rise from $915 million in 2007 to $1.3 billion in 2011, a compound annual growth rate of 9.5%, according to the latest TowerGroup forecasts.

But the analyst group says although rapid growth in OTC derivatives is driving technology spending there is currently no "single system" for broker dealers that provides the structure and processing capabilities required.

With the rise in e-trading and automation, TowerGroup says certain "vanilla" OTC derivative products can be handled effectively as they are, but processing of hybrid derivatives is continuing to challenge broker dealers.

In order to improve processing, TowerGroup recommends that firms remove legacy systems that don't support new volumes and products and combine derivatives trading systems with a service-oriented architecture (SOA) to aid in the integration of disparate trading applications. Dealers should also look to harness extra computing power for complex risk measurement through the use of Grid computing.

Firms should also develop a vendor management system, says TowerGroup, and determine which suppliers have developed modules that represent emerging industry standards.

Stephen Bruel, analyst in the securities and capital parkets practice at TowerGroup, says: "Due to the fast moving nature of the OTC derivatives environment, the industry is seeing increased spending on technology as well as increased pressure on technology firms to keep up with derivatives innovation. The successful management of these challenges will enable broker dealers to reap the rewards associated with this high growth, high margin derivatives business."

Last month the Bank for International Settlements called on financial firms to introduce automated systems to cut confirmation backlogs in the over-the-counter derivatives markets.

Publish Date:04-09-2007

Source:http://www.finextra.com/fullstory.asp?id=16765

Algo Takes Credit

A new report predicts algorithmic trading will move into the credit and commodity markets within the next decade, but there is work to be done to ensure success.

The mushrooming market for algorithmic trading will expand into the markets for credit default swaps (CDSes), corporate securities and commodities, according to a new report from Datamonitor, a London-based analyst firm. The report, "Trading System Transformations in Global Markets," predicts that the next generation of algorithmic trading models will penetrate the credit and commodity markets by 2015.

Nii Barnor, an analyst at Datamonitor, says Bank of America, Citi, Goldman Sachs, Lehman Brothers and Morgan Stanley are leading the charge in the evolution of algorithmic trading to meet the demands of traders seeking ever-faster connectivity to new markets. "As the market becomes more standardized, it is expected that algorithms will move into the realm of CDSes and corporate securities. In addition, as commodity exchanges become more electronic, fluctuations in prices will push the demand for mathematical solutions to quickly capitalize on opportunities," the report states.

Datamonitor estimates that global spending on algorithmic trading on derivatives, foreign exchange and commodities will more than double from $31 million in 2006 to $79 million in 2009. However, that figure is still dwarfed by current global spending on algorithmic trading for equities trading, which reached $176 million in 2006.

Read the complete article at http://www.watersonline.com/public/showPage.html?page=435896

Source:http://www.watersonline.com
Publish Date:01-March-2007

DTCC rebates $3m to derivative dealer customers

The Depository Trust & Clearing Corporation's (DTCC) Deriv/SERV business announced today a record year of performance supporting the global over-the-counter (OTC) derivatives market, with transaction volume tripling in 2006 and DTCC providing a first-time rebate of $3 million to its global derivative dealer customers.

Key accomplishments for DTCC Deriv/SERV:

• Processing a record 2.6 million in transaction volume in 2006, a nearly three-fold increase from the 945,000 handled in 2005;
• Increasing matching and confirmation rates for credit derivatives trades (i.e. credit default swaps) to more than 80% in 2006 up from 15% in 2004 through Deriv/SERV. This increase has played a key role in addressing regulators concerns about improving efficiency and managing risk in the marketplace;
• Growing Deriv/SERV's global customer base to 753 global derivatives dealers and buy-side firms from 207 the prior year. DTCC has the largest community of users for post-trade processing in the OTC derivatives market. Deriv/SERV customers include all major derivatives dealers and a rapidly growing number of investment managers and hedge funds in 30 countries;
• Extending the Deriv/SERV service to include additional OTC credit, interest rate and equity derivative products, thereby giving the industry a fully-integrated, single gateway through which market participants can automate processing and reduce risk for a wide range of OTC derivatives products;
• Launching the Trade Information Warehouse to provide an automated central repository for tracking OTC derivatives contracts over their life cycle, which can extend for years. This large-scale global initiative was singled-out by global regulators (U.K.'s Financial Services Authority, U.S. Securities and Exchange Commission, Federal Reserve Bank of New York) in a September 2006 Financial Times Op-Ed as important in strengthening the "systems and risk" mitigants that exist in the market.

Driving Down Costs

"DTCC's vision is to help our OTC derivative customers minimize operational risk, lower costs and facilitate growth by delivering a centralized, borderless automated solution to process trades in this dynamic market," said Robert McGrail, executive managing director, Domestic and International Core Services, DTCC.

"Following a yeaa year of exceptional performance for Deriv/SERV, we are pleased to provide this first time rebate to our dealer customers. Though modest, it reflects our commitment to bringing the benefits of cost efficiency back to our clients. We anticipate making future rebates as our transaction volume and client base continue to increase and we achieve the economies of scale that drive costs down further," said McGrail.

As a member-owned organization, DTCC and its subsidiaries operate on an "at-cost" basis, charging transaction fees for services and then returning excess revenue to its members. Deriv/SERV's dealer customers are charged these "at-cost" fees, which include volume discounts, while buy-side firms are not charged to use the service.

Deriv/SERV: The Global Industry Standard

Recognized by the industry as the global standard for post-trade processing for the OTC credit derivatives market, Deriv/SERV's matching and confirmation service played a key role in helping market participants reduce the backlog of unconfirmed credit derivatives trades by 80% as of June 2006.

Deriv/SERV was expanded in May 2006 to include credit default swap index tranches and expects in the spring to accommodate CDS on loans and CDS on single name asset backed securities. Automated support of lifecycle events for OTC interest rates derivatives went live last October. This spring, the service also expects to expand its comprehensive European and North American equity derivatives coverage to accommodate equity derivatives products such as Asia ex-Japan share and index options and swaps and Japanese index variance swaps. With these additions, Deriv/SERV expects the service will support more than 60 OTC equity, interest rates and credit derivatives products by the first half of this year.

Trade Information Warehouse: A material step forward for the market

Working closely with market participants worldwide, DTCC's launch of the Trade Information Warehouse last November is aimed at addressing industry concerns about the efficiency and certainty of post-trade processing for OTC derivatives contracts throughout their lifecycle, which can extend for years. It is designed to be a comprehensive trade database and support infrastructure that automates and standardizes post-trade processes such as payment calculation and settlement, notional adjustments and contract term changes.

In a March 10, 2006 letter to global regulators, leading credit derivatives dealers cited the development of the warehouse as a "material step forward in reducing operational risk and increasing operational efficiency in the credit derivatives market." Regulators also publicly encouraged robust adoption of the warehouse by industry participants, citing its importance in sustaining a more automated post-trade processing environment.

In December, DTCC announced that it selected CLS Bank International as its partner in providing central settlement of payments for OTC derivatives contracts housed in the warehouse. DTCC also extended its collaborations to include such service providers as Coretexa, Interwoven, Omgeo, SWIFT, Thunderhead, complementing connectivity Deriv/SERV has with such service providers as MarketAxess, Markit, T-Zero and Thomson Trade Web.

Source - http://www.finextra.com/fullpr.asp?id=13805

Publish Date - March 08, 2007