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