GlobeOp Integrates Auto-novation Processing with DTCC Deriv/SERV

GlobeOp Financial Services, an independent provider of business process outsourcing, financial technology services and analytics to hedge funds and asset managers, has rolled out an automated novation processing for credit derivatives. The service supports the Operation Management Group's (OMG) commitment that the industry will implement automated novations for credit derivatives by the end of 2008.

Auto-novation enables all trade counterparties to receive real-time notification, standardized information and novation consent electronically via DTCC Deriv/SERV. Through GlobeOp's direct, real-time link to DTCC, clients can execute novations electronically, and be fully integrated with GlobeOp's straight-through-processing (STP) into trade booking, accounting, risk and other systems. The entire process occurs within GlobeOp's GoOTC over-the-counter (OTC) derivatives trade processing system.

"Providing this link to the Deriv/SERV novation process helps clients reduce operational risk by replacing novation consent emails with a robust real-time electronic platform," said Jon Anderson, global head of OTC derivatives, in a press release. "GlobeOp's technology platform reduces errors related to manual booking & email processes, eliminates time spent booking assignments and increases efficiency through autogeneration of trade confirmation to DTCC. This latest innovation also enables our clients to act ahead of the February 28, 2009 deadline after which major dealers will not accept novation consents by email," he said.

By Leslie Kramer

Source URL: http://www.wallstreetandtech.com/showArticle.jhtml?articleID=212501198
Publish Date: December 18, 2008

Banks Prefer Mandatory CDS Clearing Over Exchange-Based Model

LONDON, Nov 20 - Some of the world's top banks are backing a proposal to develop a mandatory central clearing system for the $55 trillion credit default swap (CDS) market, a report in the Financial Times said on Thursday. Dealer banks are stepping up efforts to back CDS clearing to head off a more radical overhaul, which includes a proposal to move trading of over-the-counter CDS on to an exchange, the report said, citing an internal Morgan Stanley email.

Credit default swaps, which protect against a debt issuer's default, have been blamed for the worsening financial crisis, and banks fear that they might lose business if regulators insist on an exchange model for trading, the FT said.

"We have teamed up with a small group of dealers to put together a legal and regulatory proposal for CDS which we will propose to Congress and the Fed in an effort to address many of their concerns around CDS," said the internal email, sent by James Hill, a managing director at Morgan Stanley, according to the FT.

"This proposal will include mandatory clearing of CDS, margin rules, oversight of dealers and large market participants and SEC jurisdiction over anti-fraud and market manipulation activities," the email said.

Morgan Stanley could not immediately be reached for comment.

Publish Date:November 20, 2008
Source URL: http://www.wallstreetandtech.com/showArticle.jhtml?articleID=212101000

PWG Offers Initiatives to Strengthen OTC Derivatives Oversight and Infrastructure

The President's Working Group on Financial Markets is rolling out a series of initiatives to strengthen oversight and the infrastructure of the over-the-counter derivatives market.

Initiatives include the development of credit default swap central counterparties, some of which will commence operations before the end of 2008, and the establishment of a Memorandum of Understanding regarding CDS central counterparties among the Federal Reserve Board of Governors, the Securities and Exchange Commission and the Commodity Futures Trading Commission. The PWG also rolled out a broad set of policy objectives to guide efforts to address the full range of challenges associated with OTC derivatives and issued a progress summary to provide an overview of the results of ongoing efforts to strengthen the infrastructure of OTC derivatives markets.

The Treasury Secretary serves as Chair of the group, which includes the Chairs of the Federal Reserve Board, the Securities and Exchange Commission, and the Commodity Futures Trading Commission. The PWG, working with the Office of the Comptroller of the Currency and the Federal Reserve Bank of New York, has been actively overseeing improvements underway in OTC derivatives markets and the reports issued today identify the progress already made and specific objectives for the relevant supervisors going forward.

Over-the-counter derivatives are integral to the smooth functioning of today's complex financial markets and, with appropriate regulatory oversight and prudent management can enhance the ability of market participants to manage risk. The rapid growth of OTC derivatives markets over the past several years reflects their increasing importance to market participants.

Publish Date:Nov 17, 2008
Source URL: http://www.wallstreetandtech.com/showArticle.jhtml?articleID=212100253

Cheque mate - How AIG got Uncle Sam over a barrel

JUST how concerned should American taxpayers be about American International Group (AIG), the insurance company brought to its knees by its escapades in the credit-derivatives market? On November 10th a revised rescue package was announced, comprising $153 billion of capital injections and loans. That is the largest bail-out for any firm, anywhere, during the crisis. Is the government being, as AIG’s new chairman says, “very, very smart”, or has it been taken for one of the most expensive rides in corporate history?

Even on September 16th, when the state first intervened, AIG was a controversial candidate for assistance. Its insurance businesses are ring-fenced by local regulators and individually capitalised, precisely so they can survive a collapse of the holding company. A bankruptcy was avoided only because of the size of the holding company’s book of toxic credit derivatives, which senior executives barely understood. These left AIG so intertwined with other financial firms that its failure was judged by the Federal Reserve and Treasury to endanger the financial system.

Whether that judgment was right remains unknowable. But it is now clear that the original plan was flawed. That may be understandable: panic was in the air, AIG faced crippling collateral calls and Lehman Brothers had just folded. And the authorities lacked the wide powers granted by the Troubled Asset Relief Programme (TARP) approved by Congress in October. Unorthodox options, such as splitting the systemically threatening credit derivatives from AIG, were not under discussion.

As a result, the original plan looked a lot like the traditional remedy for a liquidity crisis at a solvent bank. The Fed offered a two-year, $85 billion loan. AIG would pay a penal interest rate and cede to the state an equity stake of just under 80%. But as collateral calls mounted on the credit derivatives, and AIG admitted to new problems, it became plain that the loan was too small. It was also too expensive: in the first year it would have cost almost as much as AIG’s profits in 2006, its best year ever.

Meanwhile the chances of AIG being able to repay the loan also shrank. In the second quarter, it had only $59 billion of core equity capital (defined here as book equity less goodwill, tax assets and stock ceded to the state). By the third quarter, more losses had cut this to a meagre $23 billion. Worse, much if not all of AIG’s capital sits “stranded” in the ring-fenced insurance units. That makes it hard to funnel it up to a holding company that is otherwise almost certainly insolvent.

The original solution was to sell the insurance operations to raise cash, but with AIG’s competitors also reeling, this looked less and less realistic. The alternative, of AIG tapping credit markets to repay the state, became ridiculous by early November. AIG’s own credit spreads implied that the company was headed for default (see chart). Prospects of even rolling over the $64 billion of non-government borrowing due to mature by 2011 became increasingly bleak.

That forced the hand of the authorities. In one sense the new package does what, with the benefit of hindsight, should have happened all along. The Fed will provide $53 billion of funding for two vehicles which will, in effect, assume AIG’s most toxic credit derivatives and mortgage-backed securities. These positions have been marked to fairly conservative levels.

In an alternative universe the government could then walk away, confident that it had dealt with the worst of the systemically important credit derivatives and that the insurance operations remained safely ring-fenced. But in the real world the state is now the biggest lender to AIG, which has drawn down the bulk of the original $85 billion facility. AIG has Uncle Sam in a bind. As a result, the Treasury, through the TARP, has been forced to recapitalise the insurer by purchasing $40 billion of preference shares. Despite this its economic stake in the firm will remain just below 80%. The Fed will also maintain a loan facility, on more generous terms, of $60 billion. And if AIG struggles to refinance its debts, it is quite possible that the state will provide a formal guarantee.

The Treasury has secured crowd-pleasing concessions; for example limits on executives’ bonus payments. But the real question is whether the preference shares are safe. AIG has a trillion-dollar balance-sheet. There is now a thin buffer of core equity between the taxpayer’s preference shares and any further losses. The hope is still that as markets recover, AIG can sell the crown jewels of its insurance business at a premium to book value. That may well take years. Plenty of time to reflect on how an offer of a temporary loan, to a company that barely made the list of systemically vital firms, spiralled into one of the biggest corporate bail-outs ever.

Source URL: http://www.economist.com/finance/displaystory.cfm?story_id=12607251&fsrc=rss

Europe to Crack Down on Derivatives Risk

The European Commission said on Friday it intends to make proposals to control risks in the $60 trillion credit derivatives market, seen as one of the causes of the worst financial crisis in 80 years.

"Regulators need to have a much better view of where the real risks in these instruments lie," EU Internal Market Commissioner Charlie McCreevy said in a statement.

"I would like to have by the end of this year concrete proposals as to how the risks from credit derivatives can be mitigated," McCreevy said.

The contracts are traded over-the-counter or off an exchange, and are therefore more lightly regulated with risks less controlled.

Contracts could be standardised more, McCreevy said.

"But there is a far more pressing need and that is to have a central clearing counterparty for these derivatives," he said.

Standardised derivatives are already traded and cleared on exchanges such as Eurex, Liffe and the CME. But the off-exchange market, with its bespoke contracts, is far bigger.
One sector, credit default swaps (CDS) are "insurance" against a company defaulting and have been widely traded, with poor records of where these contracts have ended up or whether the owners have the capital to honour them if needed.

Central clearing for credit derivatives such as CDS contracts was particularly urgent, McCreevy said.

"No one is able to say how these swaps will unwind. Regulators have little sight of potential liabilities that could be building up for individual participants," he added.

McCreevy's moves mirror those in the United States where the Securities and Exchange Commission and Federal Reserve Chairman Ben Bernanke have said there should be more oversight of credit derivatives.

The Commodity and Futures Trading Commission, which oversees derivatives in the United States, has said centralised clearing of contracts is an "immediate" step that could be taken to cut risk.

Liffe said on Thursday it has struck a deal with Markit Group, a financial information provider, to launch exchange-traded credit default swaps that are cleared centrally.

Publish Date: October 17, 2008
Source URL: http://www.wallstreetandtech.com/showArticle.jhtml?articleID=211201590

Wall Street Systems launches post-trade processing utility

Wall Street Systems has launched a "pay as you go" post-trade processing utility for FX cash, FX derivatives, money markets, vanilla interest rate derivatives, and listed futures and options.

Launched in conjunction with industry partners Currenex, Bloomberg, Icap and Logicscope, the Electronic Settlement Network (ESN) provides an outsourced, on-demand processing hub for financial institutions, eliminating the need for large investments in IT infrastructure, upfront software license fees and ongoing operating costs.

Its services span the entire post trade lifecycle including position management, P&L, deal confirmation, settlement, credit exposure, cash management, scenario and risk analysis, accounting, reconciliation, overall workflow and reporting.

Wall Street Systems' last foray into providing outsourced post-trade processing services was the Settlement & Operations Clearing eXchange (SOCX) - a joint venture with Deutsche Bank, that launched in 2001 but failed to win any clients. The venture closed when Deutsche Bank took its processing back in-house in 2003.

Tony White, managing director of product and research and development at Wall Street Systems, says the vendor learned a few important lessons from that experience.

"The costs and risks of many outsourcing arrangements are seen as being too high, so we've gone with a pay-as-you-go model for ESN, where we assume all the risk," says White.

"Having a bank involved as an owner of the utility is also not the best thing, as other banks don't want to benefit their competitor by helping reduce their cost of processing," he says. "And SOCX was also too technical, which turned off a lot of the tier two banks that could have been clients. So we've tried to make connectivity and client on-boarding as easy as possible by partnering with Logicscope."

Wall Street Systems also partnered with Logicscope last year to add post-trade notification and STP capabilities to its Wallstreet FX ASP hosted foreign exchange dealing system.

Wall Street Systems claims the on-demand ESN service sets the benchmark for the lowest trade processing costs in the industry. "It's coincidentally good timing to be launching such a service," says White. "With the current restructuring in the financial services industry there is an increased cost focus and a shift back to vanilla products. Tier two banks are also aware that there's no competitive advantage in trade processing."

Rajeena Brar, consultant at Pierre Audoin Consultants (PAC) says: "As FX further establishes itself as a fast-growing asset class, a utility model such as this is a natural evolution for the industry. This has been evidenced by the adoption of shared service models in other sectors, which have drastically improved operational efficiencies and costs."

On the issue of cost, White believes that lots of banks are deluding themselves about the true cost of processing, particularly small banks that don't have the volume required to run a cost-efficient processing operation.

While individual bank circumstances will vary, Wall Street Systems claims that ESN can reduce average cost per trade from $25 to under $1.

The company currently has three pilot customers that have been trialling the service - describes as "tier two banks", although one of them is among the top 10 banks in the US. In terms of geographic focus, the service is initially targeted at North American and European firms. The vendor hopes to have five clients on board by the end of this year and 10 by the end of 2009.

Source URL: http://www.finextra.com/fullstory.asp?id=19133

Bank of New York Mellon Chosen to Help Manage $700 Billion Bailout

The Bank of New York Mellon today confirmed that it has been selected by the U.S. Department of the Treasury to provide a range of services to support the government's Troubled Asset Relief Program authorized under the Emergency Economic Stabilization Act (aka the $700 billion bailout bill).

Treasury has hired the company to provide the accounting of record for the portfolio, hold all cash and assets in the portfolio, provide for pricing and asset valuation services and assist with other related services. The Bank of New York Mellon will serve as auction manager and conduct reverse auctions for the troubled assets.

The company's support will be administered through its securities servicing businesses.

"Our market leadership and experience have given us a keen understanding of the challenges facing the U.S. Treasury in these extraordinary times," said Robert P. Kelly, chairman and chief executive officer of The Bank of New York Mellon. "We will immediately deploy our resources and expertise, joining the team of public and private organizations that are working hard to earn the trust of the American taxpayers and to address the ongoing economic challenges."

The Bank of New York Mellon has a long history of partnering with the U.S. government to drive the development of the markets. Its founder, Alexander Hamilton, was the first Secretary of the Treasury. The company made the first-ever loan to the U.S. government and provided financing for the construction of the Erie Canal. Another key company leader, Andrew Mellon, served as Secretary of the Treasury during three presidential administrations.

Today, The Bank of New York Mellon has $23 trillion in assets under custody and administration, more than $1.1 trillion in assets under management and services $12 trillion in outstanding debt

Publish Date: Oct 14, 2008
Source URL: http://www.wallstreetandtech.com/showArticle.jhtml?articleID=211200501

NY Fed Calls Friday Meeting for CDS Players to Determine Clearing House

The Federal Reserve Bank of New York said Wednesday it has summoned participants in the $55 trillion credit derivatives market to a meeting on Friday, which sources say will focus on determining which clearing house the market will support.

Calls for regulation and centralized clearing of credit default swap trades have gathered steam in the wake of Lehman Brothers' failure last month.

Critics charge that credit default swaps are central to the spreading fears in the markets and pose systemic risks, as the market's private nature makes it impossible to know the size of a counterparty's exposures and where they are distributed.

A central clearinghouse will remove the risk of a large counterparty failure.

There are several competing plans to launch a clearinghouse under way. But the Fed wants one clearing house to win widespread support, sources familiar with the meeting said.

The Fed hosted a meeting Tuesday to discuss the matter, but found no clear winner, sources said. The meeting on Friday will continue the discussions.

The Chicago Mercantile Exchange, or CME Group Inc , and Citadel Investment Group unveiled plans on Tuesday for an electronic exchange for credit default swaps, which they said would be integrated with a central clearinghouse.

The initiative is competing against dealer-owned Clearing Corp, which will act as a central counterparty to the market and is expected to launch by year-end.

Dealers have been hesitant to support exchange trading in the past as the private market is more profitable, and the liquidity they provide may be key to the success of exchange trading.
CME and Citadel are offering equity stakes in their joint venture to major market participants to encourage their support for the exchange.

Meanwhile, NYSE Euronext's Liffe unit has also said it will launch its BClear OTC clearing house facility in the fourth quarter.

U.S. business television channel CNBC also reported on Monday the Fed was planning talks with the CME and the Intercontinental Exchange, or ICE, on the creation of a credit default swaps exchange.

Publish Date:October 09, 2008
Source URL:http://www.financetech.com/showArticle.jhtml?articleID=210800639

Auction Settles $400 Billion Worth of Lehman-Related CDSs

In an auction held today for the bankrupt Lehman Brothers by the International Swaps and Derivatives Association, Markit and Creditex, $400 billion worth of Lehman-referencing credit default swaps were settled. The final price for the contracts was 8.625%, in other words, sellers of credit-default protection will have to pay holders 91.375 cents on the dollar. (The total amount of cash exchanged will net out to about 2% of that $400 billion notional amount because the participating firms have multiple contracts with each other.) The auction took place electronically on a Creditex trading platform.

At a press conference this afternoon, ISDA executive director and chief executive officer Robert Pickel spoke proudly of the event, saying the auction went smoothly and efficiently, following successful implementation of ISDA's CDS protocol. He noted that auctions for Fannie Mae and Freddie Mac related derivatives took place earlier this week and that upcoming auctions will settle derivatives referencing Washginton Mutual and three Iceland banks.

Pickel spoke glowingly of the CDS market in general. "Despite defaults in recent months, CDS markets remain strong," he said. "CDSs have come under scrutiny and criticism lately, but CDS contracts did not cause any firm to fail. The underlying problem affecting firms is the risks they chose to take on."

Publish Date: October 10, 2008
Source URL: http://www.wallstreetandtech.com/showArticle.jhtml?articleID=211100202

OTC Markets Handle Increased Demand in September

The over the counter (OTC) wholesale financial markets successfully handled increased demand during the month of September, according to ICAP, an interdealer broker. In the OTC spot FX market, average daily electronic broking volumes on ICAP's EBS platform in September reached a new high of US $274.2bn. This is an increase of 43 percent on September 2007. In the 12 months ending September 30, 2008, average daily electronic FX broking volumes on the EBS platform increased by 31 percent over the corresponding period in 2007 to $219.2bn.

Average daily volume in US Treasury products on the BrokerTec platform increased 18 percent year on year in September to $172.8bn. Total average daily electronic broking volumes at ICAP, including spot FX, US repo, EU repo and US Treasury products increased nine percent year on year in September to $903.2bn.

"The OTC financial markets are functioning very well and OTC market participants including banks, brokers, prime brokerage clients and post trade providers, have worked together to respond to the increased volatility. The EBS and BrokerTec platforms continue to deliver orderly, reliable and fair access to highly liquid and transparent markets. The high performance of our e-platforms during recent extreme conditions demonstrates ICAP's key role in the OTC markets and underscores our ability to provide value to our customers at all times," said David Rutter, deputy CEO for ICAP electronic broking, in a press release. Each month ICAP publishes average daily volume data in spot FX, U.S. Treasury and European and U.S. repo products.

Publish Date: October 03, 2008
Source URL: http://www.advancedtrading.com/showArticle.jhtml?articleID=210605541

The Rush to Regulate Credit Default Swaps

It seems like politicians, regulators and even the average Joe on the street now knows something about credit derivatives. These complex instruments are being blamed for the near meltdown in the financial system. No one outside of the credit markets paid much attention to credit default swaps or CDS until they threatened Bear Stearns and Lehman Brothers.

On Monday, New York State Governor David Patterson said his state had the authority to regulate part of the credit default swap market and would require issuers to register as insurance dealers. Patterson told the media that his state’s insurance department would regulate CDS as insurance products in cases where the buyer of the derivative owns the underlying bond.
But the chorus of voices recommending increased regulation of credit default swaps has been growing in recent days, following the bankruptcy of Lehman Brothers, the fall of Fannie Mae and Freddie Mac and the bailout of AIG.

On Tuesday, SEC Chairman Christopher Cox called for giving the agency the authority to regulate credit default swaps. Testifying before the Senate Banking Committee on the turmoil in U.S. credit markets, Cox told Congress “the $58 trillion notional market in credit default swaps— double the amount outstanding in 2006 – is regulated by no one.”

Right now these over-the counterderivatives are not traded on an exchange, and are not regulated by any of the traditional regulators- such as the SEC or CFTC. “Neither the SEC nor any regulator has authority over the CDS market, even to require minimal disclosure to the market,” Cox told the Senate.

It’s believed that the credit derivatives market contributed to the fall of Lehman Brothers and AIG, as the cost to buy protection against a bond default surged and pushed down their stock prices.

But the real danger is that brokers and hedge funds were apparently using credit default swaps to speculate on which financial trading counterparty would default next. They could sell the CDS without owning the underlying bond on which it was based. “Economically, a CDS buyer is tantamount to a short seller of the bond underlying the CDS,” said Cox in his speech. “This means CDS buyers can ‘naked short’ the debt of companies without restriction.”

Some traders used the credit default swaps to bet on the likelihood of default in the bonds of their trading counterparties, namely Lehman Brothers, AIG and Morgan Stanley. As the cost of buying protection against holding the bonds of banks and brokers surged, traders used that as a signal to short the stocks, which caused the credit agencies to lower their ratings, thereby raising the cost of capital for these companies and sending them into a cash crunch and death spiral. The SEC is concerned that credit derivatives were used to manipulate the pries of securities companies and drive them out of business.

As part of its stepped up enforcement efforts, Cox told Congress, the SEC is conducting a sweeping investigation of market manipulation of financial institutions, focused on broker-dealers and institutional investors with significant trading activity in financial issuers and with positions in credit defaults swaps. It would be easier to conduct the investigation if these instruments were traded electronically on a centralized exchange. But CDSs are for the most part traded over-the-counter, between dealers, banks and asset managers. On the dealer side, Creditex, a business that was owned by the dealers and recently sold to the InterContinental Exchange (ICE) offers an execution platform for use by the dealers.

It’s clear that regulators are now focusing on the need for oversight and transparency in credit derivatives. Usage of CDS has grown dramatically among traditional asset managers and hedge funds, which means they are exposed to the counterparty risk of the investment banks that sold them protection. No doubt, there will be renewed calls for trading credit derivatives on exchanges, which can work for standardized, highly liquid contracts, and for a central clearing counterparty. But what will happen to the more customized instruments, known as bespoke instruments? In a research note published this week, TowerGroup’s Senior Research Director for Investment Management, Dushyant Shahrawat, predicts, “Brokerage firms burned by OTC derivatives like credit default swaps and other esoteric structured products will greatly reduce their involvement in these instruments.” Despite resistance from the dealers, Bloomberg reported yesterday that credit swaps could move to an exchange in order to exist.

In the meantime, politicians are learning more about these instruments and forming quick opinions. Patterson told The New York Times he had not heard of credit default swaps until he read an article in The Economist six months ago. He said he thought they should be regulated by the gaming industry and he equated the derivatives with gambling.

Publish Date: September 25, 2008
Source URL: http://www.advancedtrading.com/blog/archives/2008/09/the_rush_to_reg.html?cid=nl_wallstreettech_daily

Wall Street Meltdown Making Buy-Side Firms Really Rethink Sell-Side Relationships

In the aftermath of the elimination of four bulge-bracket firms (Lehman Brothers through its bankruptcy and sales of assets to Barclays and Nomura; Merrill through its sale to BofA; Goldman and Morgan Stanley through becoming bank holding companies) from the ranks of independent brokerage firms, new research from TowerGroup finds that the unprecedented restructuring underway on Wall Street will have major and lasting impact on the investment management business.

TowerGroup believes the apparent demise of the independent brokerage model will force investment management firms to carefully reassess their reliance on Wall Street brokerage firms for research, trade execution, market insight, and back-office services. "Brokerage firms play a vital role in the smooth functioning of the overall financial system by providing liquidity, being market makers, and assuming risks, which becomes critical during periods of market uncertainty," says Dushyant Shahrawat, a senior research director in the TowerGroup
Investment Management practice and author of the report, "How the Massive Upheaval on Wall Street Will Impact the Investment Management Business." "Although many Wall Street firms have found new homes in large commercial banks, it is highly unlikely their new parents will allow them to perform all these essential functions," Shahrawat wrote in the report.

Derivatives may lose their luster, the TowerGroup suggests. "Now that fewer brokerage firms facilitate over-the-counter derivatives trades and structured products, asset management firms may reduce their use of the products (at least temporarily) and instead make greater use of exchange-traded instruments," says Shahrawat. "Intense scrutiny in the use of derivatives and structured products will force asset management firms to reassess their use of these products, the way they are valued, the way firms manage risk related to them, and counterparty exposure related to them."

In all, TowerGroup predicts that the Wall Street upheaval will impact the buy side in eight key ways:
1. Less capital commitment from Wall Street.
2. Disruption in the provision of execution services.
3. Changes in securities lending services
4. Greater focus on risk management
5. Decreased buy-side appetite for structured products
6. Shift in order flow from dark pools to crossing networks
7. Buy-side opportunity to hire top Wall Street talent
8. Elevated positions of second-tier brokers, independent EMS providers, and OMS vendors

"This colossal upheaval raises scores of questions for asset managers, both in the short term and looking ahead to 2009," Shahrawat says. "Who will provide capital in times of need? Who will be confident enough in their risk models to assume risk for clients and counterparties? Who will fuel the underwriting of new companies and even new industries? Who will drive the growth of structured finance?"

TowerGroup believes recent changes in the brokerage industry will have both direct and indirect implications for the IT budgets at asset management firms. TowerGroup anticipates a decline of three to four percent in technology spending across the investment management industry in 2008 and 2009, as firms are forced to cutback expenditure amid declining assets under management and growing pressure on fees.

Publish Date: September 24, 2008
Source URL: http://www.wallstreetandtech.com/showArticle.jhtml?articleID=210603648

TABB Group Forecasts Monthly Novation of Credit Default Swap (CDS)

Eighteen years after the credit default swap (CDS) was created to help firms hedge against the risk of default of a given asset, TABB Group estimates that the average notional value at risk (the total value of a leveraged position's assets) of trades novated monthly will exceed $45.2 trillion by 2010, an 88% CAGR (compound average growth rate) from 2005.

Kevin McPartland, senior analyst and author of the new TABB Group research report "Credit Default Swaps: The Risk of Inefficient Markets," said in a press release that 90% of all CDS trades are confirmed electronically, but same-day matching of new trades and novations is rare and error rates are unacceptably high. "This is a lot of money to risk on a phone call," he added. TABB Group forecasts that nearly $170 million will be spent in 2010 by major sell-side broker-dealers to automate the affirmation process and mitigate the potential risk resulting from trade exceptions.

Despite current available technology, details of most CDS trades are still not affirmed between counterparties on trade date. The delay is not in legally confirming or settling trades, but simply in agreeing that each party recorded the same basic trade details such as the reference entity or notional amount. Where overnight batch jobs were once accepted solutions, with 2008 trading volumes and market volatility levels, explains McPartland in the release, "the risk created by not understanding your market and counterparty exposure until the next morning makes this standard practice rather unacceptable."

Publish Date: September 04, 2008
Source URL: http://www.wallstreetandtech.com/showArticle.jhtml?articleID=210300535

China Development Industrial Bank Outsources Trading Desk to Derivatives.com

Taipei-based China Development Industrial Bank (CDIB) has rolled out Imagine Software's Derivatives.com ASP-based solution to power the bank's new multi-strategy, global macro trading desk.

"The first and most immediate necessity for our new desk was an integrated multi-asset solution that could provide real-time front-office, middle-office, and risk management functions," stated Bertrand Hongre, head of macro trading at CDIB, one of Taiwan's largest and leading venture capital and investment banking institutions.

Among the factors that weighed on its vendor selection — including industry-leading functionality, fast deployment and implementation capabilities — were cost efficiencies and economies of scale.

"We think an ASP-based solution is infinitely preferable to a traditional software implementation. Not only is Imagine's Derivatives.com inherently easy to deploy, but because it's a completely outsourced solution, the bank avoids incurring the customary internal IT and data management support requirements," said Hongre.

CDIB plans to spin the desk off into a standalone fund in years to come, so a portable ASP-based solution outsourced from CDIB's internal infrastructure is suited for that purpose, added Hongre. In addition, Hongre said that Imagine could become a future alternative to CDIB's existing systems for fixed income, credit and commodities businesses, and it looks forward to expanding its usage of the real-time portfolio and risk management product.

Publish Date: September 02, 2008
Source URL: http://www.wallstreetandtech.com/showArticle.jhtml?articleID=210300092

Omgeo Acquires Allustra and Launches Integrated Derivatives Product Line

Omgeo has acquired London-based collateral management technology provider Allustra. Allustra offers a suite of products that provide customers the ability to consolidate trade positions across asset classes, including OTC derivatives, and to manage the collateral process that mitigates the associated counterparty risk. Mark James, managing director of Allustra, joins Omgeo's executive committee as managing director.

In addition, Omgeo acquired a derivatives portfolio reconciliation platform designed by Global Electronic Market's (GEM), after piloting the technology with a brokers/dealer and a hedge fund. By joining GEM's derivatives reconciliation capabilities with Allustra's collateral management solution, Omgeo now offers a combined derivatives product line.

Publish Date: September 15, 2008
Source URL: http://www.wallstreetandtech.com/showArticle.jhtml?articleID=210601553

Markit Updates CDX Indices, Red Codes

Markit, the financial information services company that owns the Markit CDX indices and Markit RED, is making changes in response to the US government rescue of Federal National Mortgage Association ("Fannie Mae") and Federal Home Loan Mortgage Corporation ("Freddie Mac") under a conservatorship, which is classified as a bankruptcy credit event under the International Swaps and Derivatives Association (ISDA) credit derivative definitions.

New versions of all Markit CDX indices that will include either Fannie Mae or Freddie Mac as a constituent were published yesterday with both entities removed. New Markit RED codes were issued yesterday for the new versions of the Markit CDX indices, as well as for the Fannie Mae and Freddie Mac post-credit event entities, in order to reduce legal and operational risk in the credit derivative market. The Markit CDX indices are the most widely traded credit derivative indices in North America. Markit RED is the industry standard for reference entity and reference obligation identifiers used throughout the credit derivative market in trading, documentation and trade settlement.

Publish Date: September 10, 2008
Source URL: http://www.wallstreetandtech.com/showArticle.jhtml?articleID=210600857

Creditex and Markit Launch Portfolio Compression Platform

Markit and Creditex has successfully completed their portfolio compression platform for the credit derivative market including its first live runs for single name credit default swaps (CDS) in the North American and European markets.

The first North American live portfolio compression run, which took place on August 27 with the participation of 14 credit derivative dealers, was conducted for CDS contracts referencing several widely traded North American telecommunications companies. It achieved a 56% gross notional reduction of compressible contracts and a 49% gross notional reduction across all participating counterparties. The first European live portfolio compression run was held on September 4 with the participation of 15 credit derivative dealers. The service was run on CDS contracts referencing several widely traded European telecommunications companies, and achieved a 53% gross notional reduction of compressible contracts and a 46% gross notional reduction across all participating counterparties.

Markit and Creditex were selected by the International Swaps and Derivatives Association (ISDA) to provide infrastructure to support commitments made by major market participants to the Federal Reserve Bank of New York relating to improved operational efficiency and risk reduction.The new portfolio compression methodology designed by Markit and Creditex is unique in that it reduces operational risk while leaving market risk profiles unchanged. This is achieved by terminating existing trades and replacing them with a smaller number of new replacement trades that carry the same risk profile and cash flows as the initial portfolio but have less capital exposure.

The portfolio compression process will be run on a regular basis to compress the most actively traded single name CDS contracts systematically across all major sectors. This will reduce the total gross notional outstanding of CDS contracts in the $62 trillion market to a significantly smaller net amount.

Publish Date: Sep 08, 2008
Source URL: http://www.wallstreetandtech.com/showArticle.jhtml?articleID=210600161

Misys Expands Asset Class Coverage, Improves Risk Management of Derivatives Trading Platform

Misys today is rolling out the latest version of its derivatives trading platform, Misys Summit FT Version 5.3. The new version has new and upgraded modules for equities trading, structured bonds and compliance monitoring.

The result, according to Misys, is deeper integration and improved visibility, including a new market risk limit monitoring dashboard with breach alerts.

Specific new offerings within Misys Summit FT V5.3 include:

A new end to end solution for cash & equity derivatives - Misys has created a new equities platform to provide extended coverage for trading and effectively managing equity cash and equity derivatives. Front to back coverage includes pre-deal checks, real-time positions, portfolio management, pricing, risk analysis, confirmation, settlements, corporate actions, valuation and accounting.

A new module for structured bonds " As many banks are issuing structured bonds to raise funding in a flooded market, there is a need to fully support structured bonds including structuring, issuing, investing, position-keeping, hedging, swapping, credit, and auditing. The new structured bonds module leverages Misys Summit MUST's technology and has been developed in cooperation with KfW, the German banking group, to enable the processing of structured bonds in the same manner as any standard bond. The new module provides enhanced position management, call processing, capital gains, yield calculations, accounting and theoretical valuation.

Market risk limits - To help with the volatility, high volumes and huge risks associated with today's financial markets, Version 5.3 includes a new market risk limits monitoring solution with limit breach notifications and dashboards covering P&L, portfolio or trade sensitivity to risk factors, trader daily volume and many more. Instant notifications through emails, SMS and desktop alerts get information to the right people at the right time, providing an environment of protection and regulatory compliance.

Publish Date:Sep 08, 2008

Source URL: http://www.wallstreetandtech.com/showArticle.jhtml?articleID=210600303

TABB Group Forecasts Monthly Novation of Credit Default Swap (CDS)

Eighteen years after the credit default swap (CDS) was created to help firms hedge against the risk of default of a given asset, TABB Group estimates that the average notional value at risk (the total value of a leveraged position's assets) of trades novated monthly will exceed $45.2 trillion by 2010, an 88% CAGR (compound average growth rate) from 2005.

Kevin McPartland, senior analyst and author of the new TABB Group research report "Credit Default Swaps: The Risk of Inefficient Markets," said in a press release that 90% of all CDS trades are confirmed electronically, but same-day matching of new trades and novations is rare and error rates are unacceptably high. "This is a lot of money to risk on a phone call," he added. TABB Group forecasts that nearly $170 million will be spent in 2010 by major sell-side broker-dealers to automate the affirmation process and mitigate the potential risk resulting from trade exceptions.

Despite current available technology, details of most CDS trades are still not affirmed between counterparties on trade date. The delay is not in legally confirming or settling trades, but simply in agreeing that each party recorded the same basic trade details such as the reference entity or notional amount. Where overnight batch jobs were once accepted solutions, with 2008 trading volumes and market volatility levels, explains McPartland in the release, "the risk created by not understanding your market and counterparty exposure until the next morning makes this standard practice rather unacceptable."

Publish Date: Sepember 04, 2008
Source URL: http://www.wallstreetandtech.com/showArticle.jhtml?articleID=210300535

China Development Industrial Bank Outsources Trading Desk to Derivatives.com

Taipei-based China Development Industrial Bank (CDIB) has rolled out Imagine Software's Derivatives.com ASP-based solution to power the bank's new multi-strategy, global macro trading desk.

"The first and most immediate necessity for our new desk was an integrated multi-asset solution that could provide real-time front-office, middle-office, and risk management functions," stated Bertrand Hongre, head of macro trading at CDIB, one of Taiwan's largest and leading venture capital and investment banking institutions.

Among the factors that weighed on its vendor selection — including industry-leading functionality, fast deployment and implementation capabilities — were cost efficiencies and economies of scale. "We think an ASP-based solution is infinitely preferable to a traditional software implementation. Not only is Imagine's Derivatives.com inherently easy to deploy, but because it's a completely outsourced solution, the bank avoids incurring the customary internal IT and data management support requirements," said Hongre.

CDIB plans to spin the desk off into a standalone fund in years to come, so a portable ASP-based solution outsourced from CDIB's internal infrastructure is suited for that purpose, added Hongre. In addition, Hongre said that Imagine could become a future alternative to CDIB's existing systems for fixed income, credit and commodities businesses, and it looks forward to expanding its usage of the real-time portfolio and risk management product.

Publish Date: September 02, 2008
Source URL: http://www.wallstreetandtech.com/showArticle.jhtml?articleID=210300092

State Street Launches Industry Leading Over-the-Counter Derivatives Servicing Platform

New Platform Automates Processing of Over-The-Counter Derivatives to Streamline Administration for Growing Market Segment

State Street Corporation, the world’s leading provider of financial services to institutional investors, announced today the launch of an industry leading over-the-counter (OTC) derivatives servicing platform. Already beta-tested, the OTC Hub is now live with PIMCO, a leading global asset manager and long-time State Street customer.

The OTC Hub is a global, end-to-end servicing solution that automates a number of stages in derivatives processing including customer reporting, electronic trade flow and the reconciliation of positions and cash flows between the middle and back offices. The State Street platform will now reconcile data from the industry utilities and dealers to customer trade details and automates acquisition of vendor prices. The platform is flexible to allow for enhanced services and capabilities as the derivatives market evolves and industry technologies mature.

“This cutting-edge technology provides an excellent opportunity to automate what has been a manually driven and complex part of our investment servicing operations,” said Richard Tyson, executive vice president of PIMCO. “Throughout our long partnership, State Street has consistently delivered advanced technological solutions for the challenges that come with a changing marketplace.”

State Street’s new platform, The OTC Hub, automates the processing of OTC derivatives, one of the fastest growing asset classes. Since 1999, the volume of derivatives contracts has surpassed an estimated US$600 trillion, 83 percent of which has originated in the over-the-counter (OTC) market.

“The use of over-the-counter derivatives is growing rapidly and this new scalable solution will enable us to handle both the increasing volume and complexity of these transactions,” said Joe Antonellis, vice chairman of State Street. “We are pleased to offer PIMCO, a world leader in fixed-income asset management, and our customers globally a seamless solution for their derivatives.”

State Street’s enhanced platform fully supports Financial products Markup Language (FpML), a key component to servicing derivatives, and provides rich validation rules to ISDA FpML standards. Its strong price validation functionality includes both internal and customer model calculations for comparison. Additionally, the OTC Hub also provides greater depth of trade details and economics, which allows enhanced research and issue resolution.

State Street’s customers will benefit from having all aspects of their derivatives transactions automated with online access to detailed information such as resets and settlements, valuations, exposure and other risk information. These capabilities will be available via State Street’s industry leading portal, my.statestreet.com.

“The interactive-views function enables customers to easily and efficiently navigate the complexity of their derivative transactions and drill down, graph, customize and export data in a variety of ways,” said Neil Wright, senior vice president and product manager for derivatives at State Street. “Information from the OTC Hub delivered via my.statestreet.com is customized for specific customer roles, easing the implementation and adoption of State Street’s derivatives processing capabilities.”

Further demonstrating its experience in the derivatives space, State Street will launch its next Vision Series report on the topic of derivatives in late September 2008.

About State Street

State Street Corporation (NYSE: STT - News) is the world's leading provider of financial services to institutional investors including investment servicing, investment management and investment research and trading. With $15.3 trillion in assets under custody and $1.9 trillion in assets under management at June 30, 2008, State Street operates in 26 countries and more than 100 geographic markets worldwide. For more information, visit State Street’s website at www.statestreet.com.

About PIMCO

PIMCO, founded in 1971, is a global investment management firm serving a wide range of institutional and retail investors worldwide. With offices in nine countries in North America, Europe and Asia, we manage investments across a broad spectrum of global financial markets. Our success is built on our philosophy of seeking to consistently deliver attractive return opportunities while maintaining a strong culture of risk management. PIMCO is owned by Allianz Global Investors, a subsidiary of the Munich-based Allianz Group, among the leading global insurance companies.

Source:Businesswire

Publish Date: August 21, 2008

Sapient Buys Derivatives Consulting Group

Boston-based IT consulting firm Sapient has acquired London-based Derivatives Consulting Group Limited, a provider of derivatives consulting and outsourcing services to investment banks, hedge funds, asset managers and commercial banking clients, including derivative operations metrics, the result of benchmark surveys of buy-side and sell-side firms.
DCG will become part of Sapient's Trading and Risk Management practice. It will add operations benchmarking, derivatives and process expertise, operations support, technology services and off-shore capabilities to the group.

"Today's volatile markets and increasingly strict regulatory environments make this an opportune time to add DCG's capabilities to our TRM practice," said Sapient president and chief executive officer Alan Herrick.'"Regulatory scrutiny has resulted in new demands on clients to maintain compliance and reduce the risk associated with the growing complexity and volumes of these transactions."

Sapient's acquisition of DCG is supported by a number of trends: The worldwide derivatives market reached $677 trillion notional in 2007 and continues to grow dramatically, according to Celent.'While derivatives volumes have grown, there has been a lag in operations infrastructure investments. This has created greater demand for operations support and technology.'At the same time, government agencies such as the U.S. Federal Reserve and the U.K. Financial Services Authority have increased the regulation and scrutiny of derivatives transactions, further compounding the existing operational challenges.

Source URL: http://www.wallstreetandtech.com/showArticle.jhtml;jsessionid=Q0I4OGW5AJGR4QSNDLRSKHSCJUNN2JVN?articleID=210000320
Publish Date: August 08, 2008

Julius Finance Announces Credit Derivatives Valuation Service

Service to use model fusion to determine what synthetic credit derivatives are worth.

The same week Merrill Lynch announced a $5.7 billion write-down on collateralized debt obligations, Julius Finance, a provider of analytics engines and services for evaluating credit derivatives, has launched a new valuation service for estimating the value and risk of such products.

The new service will price bespoke synthetic credit derivative obligations, CDO squared, CDO cubed, constant proportion portfolio insurance, constant proportion debt obligations and credit default swaps. The valuation service makes use of Julius Finance's research in model fusion, which prices such securities by taking account of all market available information through a unified credit model.


The service is designed to assist with bespoke valuation, risk management, catastrophic risk analysis, portfolio management, scenario analysis, structured/hybrid products and trading. It's meant to be used by credit traders, credit risk managers, auditors, legal professionals and controllers.


Julius also provides market driven tail risk estimates for credit default swap and corporate bond portfolio managers, and unique insights into monoline companies such as credit derivative product companies.


Source URL: http://www.wallstreetandtech.com/showArticle.jhtml?articleID=209901408
Publish Date: Aug 01, 2008

Eurex ventures into OTC derivatives clearing

Swiss German derivatives exchange Eurex is in talks with infrastructure providers about introducing a clearing platform for the over-the-counter (OTC) credit markets.

The news comes just days after CME Group said it would expand clearing services to OTC interest-rate swaps and Markit and the Depository Trust and Clearing Corporation (DTCC) said they would form a joint venture for processing and confirming OTC derivatives.

Eurex says its new initiative - which is expected to launch in early 2009 - aims to "complement current US initiatives with a European solution".

The European OTC CCP platform will utilise existing Eurex Clearing functionality, as well as new tools for trade and risk management. The system will initially focus on iTraxx index exposures that are mainly traded out of Europe. Eurex says an extension to other asset classes - such as equity, fixed income - can be "handled flexibly" according to market demand.

The exchange says it is in discussions with several infrastructure providers concerning their involvement in a new platform. Names have not been disclosed but one of the providers is rumoured to be the DTCC.

Eurex says the new service is "designed to address recent developments in the OTC market which suggest that concerns about systemic risk due to the backlog of transaction confirmation and potential counterparty defaults require improvements in the market's infrastructure".

Thomas Book, responsible for clearing on the Eurex executive board, says customers would profit from straight-through processing, enhanced collateral management and multilateral netting for OTC trades which currently account for 84% of all derivatives traded.

Earlier this month Nyse Euronext subsidiary Liffe previewed plans to launch a new set of contracts based on the iTraxx European indexes with integrated OTC clearing through its Bclear operation.

Meanwhile in May the US Clearing Corporation (CCorp) said it had agreed a deal with the DTCC that will result in the launch of a central clearing facility for over-the-counter (OTC) credit derivatives in the third quarter.

Source URL: http://www.finextra.com/fullstory.asp?id=18763
Publish Date: July 23, 2008

DTCC, Markit to Create Single Point of Derivatives Confirmation

Washington's calls for efficient, automated processing of over-the-counter (OTC) derivatives has grown to a clamor that vendors and Wall Street firms can't ignore. Just today, Acting Under Secretary for Domestic Finance Anthony Ryan said, "With respect to market infrastructure, we are encouraging the development of an integrated operational infrastructure for the OTC derivatives market that ensures accuracy and timeliness of trade data submission, resolution of trade matching errors, and integrated processing. We are calling for a cash settlement protocol adopted by market participants and incorporated into standard documentation, and for netting, novation and clearing of OTC derivatives contracts by a centralized counterparty."

In answer to this demand -- an echo of earlier statements made by Alan Greenspan and Ben Bernanke -- the DTCC and Markit announced today the formation of a new company that will combine Markit's front- and middle-office trade processing services with DTCC Deriv/SERV's back-office post-trade confirmation and matching services, providing a single gateway for confirming OTC derivative transactions globally. Buy-side and sell-side OTC derivative market participants will be able to confirm trades and to gain access to additional services provided by Markit and DTCC through a common portal.

Industry observers responded favorably to today's announcement. "Buy-side firms are not keen to patch together a network of internal and external communication networks and systems, and have been waiting for a major dealer-backed solution," said Denise Valentine, Aite Group senior analyst. "Two dealer-backed entities " in the form of Markit and DTCC " have responded to the buy-side demand and have created a new entity to further the cause of automation and simplification."

And analysts at the Tower Group said, "This partnership will prove to be a critical turning point in the development of a single, global operating infrastructure for the full range of OTC derivatives. The combination of Markit Wire and Deriv/SERV addresses the inefficiencies associated with the current fragmented confirmations landscape, reduces the likelihood of radical regulatory intervention, and eases the strain on industry middle and back offices. Although broker dealers may be concerned that one organization now has monopoly power in OTC confirmations, TowerGroup anticipates that the governance structure will allow the industry to continue to influence the direction of the partnership. TowerGroup expects the partnership will yield a central data repository that can be the springboard for multiple new products, such as portfolio reconciliation and collateral management services."

The new company will comprise Markit's recently acquired Markit Wire platform (formerly SwapsWire) as well as its other trade processing services such as Markit Trade Manager, Markit Tie Out and Markit PortRec. DTCC will contribute its Deriv/SERV matching and confirmation engine and its AffirmXpress, MCA Xpress and Novation Consent services. Additional services that will not become part of the new company include Markit's data and valuation services and DTCC's downstream Trade Information Warehouse, centralized settlement and payment netting services.

This initiative may accelerate the adoption of electronic processing solutions across the rapidly growing, $454 trillion OTC derivative market where approximately 50% of transactions are still confirmed on paper.

The new company will be jointly owned by DTCC and Markit, and will be governed by an 11-member board of directors. Michael Bodson, executive managing director for DTCC's business management and strategy overseeing all DTCC business lines, will be chairman of the new company. Jeff Gooch, executive vice president of Markit, will be the new company's chief executive officer.

In addition to facilitating greater industry adoption of electronic confirmation, the new company will offer automated trade affirmation, trade allocation and novation consent solutions to the market on a cross-product basis. It will initially support both DTCC's and Markit's confirmation platforms.

The new company will be headquartered in London, with a second major centre of operations in New York City and representative offices in Europe and Asia. The combined business will have over 1,100 financial institutions as customers and annual transaction volumes of over 7 million across the OTC interest rate, credit and equity derivative markets.

The DTCC-Markit agreement will become effective following completion of due diligence, regulatory filings and approval by relevant global regulators, including those in the U.K. and U.S. The name of the new company will be announced at a later date.

Publish Date: July 21, 2008
Source URL: http://www.wallstreetandtech.com/showArticle.jhtml?articleID=209400184

OTC Derivatives: Substantially Reducing Risk Through Automation

OTC derivatives and the challenges they pose for financial services firms continue to garner attention from both inside and outside the industry. In March a Newsweek article titled "Surviving the Crunch" cautioned consumers against dabbling in the hype of derivatives and other "adventuresome" investment vehicles: "Definitely not as easy as it sounds," the magazine advised, "and best not tried at home." A month later an article in The Economist was headlined "Taming the Beast: It Is Time to Simplify Derivatives Trading—But Not to Stunt It." OTC derivatives could certainly benefit from some positive PR in the mainstream media, but what these so-called adventuresome investment products really need are the benefits of a new technology focus called customer communications management (CCM).

CCM enables organizations to automate the creation and delivery of highly customized communications, including contracts, policies, statements, and correspondence. The ability to manage contract negotiations and confirmations online in a secure and easy-to-use environment expedites complex OTC derivatives processes with granular-level risk management capabilities.

According to TABB Group, an independent financial markets research and strategic advisory firm, paper-based contract negotiations and confirmations still pose a threat to the OTC derivatives market some three years after the US Federal Reserve urged financial services firms to improve their processing and tracking practices. During a single three-month period alone, June to August 2007, the total number of backlogged confirmations jumped 250 percent. The backlog of trade confirmation documents—the legal records—has left the financial services sector exposed to unnecessary risk and poor client and shareholder transparency.

In the study Blazing a Trail to Automation: Confirmation Creation for OTC Derivatives, TABB Group reports that the outstanding notional value of all OTC interest rate, currency, credit, and equity derivatives has grown nearly 30 percent a year since 2002. As of mid-2007 more than $400 trillion of notional value existed in outstanding OTC derivatives contracts. Yet as the market continues to expand, the automation of processes such as contract negotiations and confirmations has not kept pace. Indeed, nearly 10 percent of the world's hedge funds use OTC derivatives as part of their strategies, but only a fraction of those have automated processing systems.

Master agreements, confirmations, and workflow processes for OTC transactions all present unique challenges to financial services firms. Negotiating a complicated master agreement, for example, requires frequent back-and-forth counterparty communication, most of which is still performed manually, leading to the significant backlogs. Each trade might have 100-plus data points to affirm with the counterparty before a custom confirmation document can be created. The creation of this document is at the heart of the OTC derivatives backlog, which has resulted in unnecessary risk and poor transparency.

Customer communication management solutions allow for the acceleration of online negotiation of trades, no matter how complex. In fact, the more complex, the more these automated solutions are needed.

CCM has the ability to provide contract creation, negotiation, approval, and execution workflow for all types of contracts and other negotiated agreements, including prime brokerage agreements, margin agreements, ISDA master agreements, and CSAs. It could include a real-time dashboard that tracks and sorts every outstanding agreement, enabling load balancing, tracking, and auditing. In addition, it can offer detailed search and advanced tools for comparing all existing agreements down to the granular content level, highlighting potential exposure and managing risk. Risk management capabilities are also included to quickly review key risk metrics, including NAV triggers, collateral events, withdrawal provisions, and other data points. The goal is to boost automation, reduce risk, and expedite complex OTC derivatives processes.

That's what a CCM solution brings to the OTC derivatives market.

TABB Group Senior Analyst Kevin McPartland, author of the study cited above, summarized the market in a manner most mainstream media audiences could easily grasp: "The market has made strides toward automating the confirmation and overall processing workflow. There are third-party products to help solve this problem, and the innovations in the past few years have been nothing short of amazing. Now it is up to market participants to acknowledge the need for automation—not only through press releases but also through action."

McPartland adds, "Both producers and consumers of OTC derivatives must invest time and money to create necessary systems and processes that are both smarter and straightforward, allowing the most obscure instruments to be handled without human intervention. New product creation and smart trading decisions may drive profits, but unless treated with the utmost care and respect, the overall confirmation process can act as a mugger on payday. Let's not just work harder, but smarter."

Here's to working smarter.

Source URL: http://www.financetech.com/showArticle.jhtml?articleID=208800884
Publish Date: June 25, 2008

Study Reveals Massive Paper Backlog in OTC Derivatives Market

Paper-based processes of contract negotiations and confirmations in the $400 trillion over-the-counter (OTC) derivatives market have created a huge backlog of trade confirmations, according to a study by TABB Group.

Since 2002, the estimated outstanding value of all OTC interest rate, currency, credit, and equity derivatives has grown nearly 30 percent a year, TABB Group said.

But as the OTC derivatives market expanded, the automation of customer communication management processes such as contract negotiations and confirmations has not kept pace.

From June to August 2007, the total number of backlogged confirmations jumped 250 percent, TABB Group revealed.

"In this world where hundreds of millions of dollars are invested in nonstandard products, human error can lead to huge monetary losses and litigation," said Kevin McPartland, TABB Group Senior Analyst.

"Automation of the customer communications process is a must-have for any business competing in this market, as the potential for loss could be devastating," he said.

The backlog of trade confirmations has resulted in poor transparency and left the financial services sector exposed to unnecessary risk. In many cases, confirmations were not only unsigned, but uncreated, the study revealed.

Source URL: http://www.financetech.com/showArticle.jhtml?articleID=208800330
Publish Date: June 23, 2008

Bar on credit derivatives may hit fund raising by India Inc

Large corporates with aggressive investment plans may find it tough to raise funds locally. The Reserve Bank of India’s decision not to allow credit derivatives will mean that banks which had touched their exposure limit to large corporate houses cannot continue funding. It was earlier expected that banks could continue funding large borrowers even after touching the exposure limit by eliminating credit risk through derivatives.

In a statement issued here on Thursday, RBI said, “It has been decided to keep in abeyance the issuance of the final guidelines on introduction of credit derivatives in India. The decision has been taken so as to be able to draw upon the experience of the financial sector of some of the developed countries, particularly in the current circumstances, in which the entire dimensions of the recent credit market crisis have not yet been gauged.”

Credit derivatives are complex financial instruments which are mainly privately-held non-negotiable contracts that allow users to manage their exposure to credit risk. They are generally financial assets like forward contracts, credit default swaps, and options. For example, a bank concerned that one of its customers may not be able to repay a huge loan can protect itself against the loss by transferring the credit risk to another party while keeping the loan on its books.

RBI had initially issued draft guidelines for the introduction of credit derivatives in India in March 2003.

Thereafter, a second draft of the guidelines was issued in May 2007. The draft guidelines had proposed a phased approach, with only the basic credit default swap being allowed in the first stage. Primary dealers would have been able to transact in a credit default swap, if the objective is to protect against the credit risk in a tradable bond. Banks also could transact in swaps, if the credit risk arose out of a bond or any credit exposure such as a loan.

Further, insurance companies and mutual funds would have been allowed to buy or sell protection only when the Securities and Exchange Board of India (Sebi) and Insurance Regulatory and Development Authority (IRDA) allowed them to do so.

However, the draft guidelines had also placed a number of restrictions. Primary among this is a requirement that all parties are required to be Indian and that deals take place in rupees. The other requirement is that protection would be provided only in respect of borrowers who are rated. Unlike some credit derivatives which can be structured to provide protection for a set of borrowers, RBI’s draft prescribes that CDS can be only in respect of a single borrower.

Source URL: http://economictimes.indiatimes.com/rssarticleshow/msid-3146874,prtpage-1.cms
Publish Date: June 20, 2008

Credit derivatives clearing facility to launch in Q3

The Clearing Corporation (CCorp) has inked an agreement with the Depository Trust and Clearing Corporation (DTCC) that will result in the launch of a central clearing facility for over-the-counter (OTC) credit derivatives in the third quarter.

Chicago-based CCorp said in December last year that it had completed a major restructuring that transferred ownership of the organisation to 17 stockholders. The group's backers now consist of 12 of the biggest global dealers - including some of the largest credit derivatives dealers - along with three leading inter-dealer brokers, derivatives exchange Eurex and Markit Group.

The group said it would work to expand its product line to include a centralised clearing facility for a number of OTC derivatives products.

CCorp began working on developments with the DTCC earlier this year that would see it act as central counterparty for credit default swap transactions registered within DTCC's Trade Information Warehouse.

Now in today's statement CCorp says the initiative is targeted to launch in third quarter of 2008.

"The agreement with DTCC will allow CCorp members to utilise CCorp as the central counterparty (CCP) guarantor for OTC contracts in credit derivatives while continuing to utilise the Warehouse as the 'golden' record for net open positions and for post trade event processing," says CCorp in the statement.

Michael Dawley, CCorp chairman, says the new facility will "improve capital efficiency, increase regulatory transparency, lessen direct counterparty risk and reduce systemic risk relating to the multi-trillion dollar market in credit default swaps".

Initially the new service will support only CDX North American high yield and investment grade indices. CDS products such as iTraxx indices, index tranches, and single name products are scheduled for subsequent roll outs throughout 2008 and 2009.

In the initial phase, joint CCorp and DTCC Warehouse members whose OTC credit derivative trades are stored in the Warehouse can elect to replace their bilateral agreements with a new CCP guaranteed trade backed by the CCorp.

Source URL: http://www.finextra.com/fullstory.asp?id=18528
Publish Date: May 29, 2008

Back offices buckle under OTC volume surge

Despite concerted efforts since 2005 to improve operational efficiency in the credit derivatives markets, trading surges in the OTC markets since the credit crunch have resulted in corresponding spikes in unconfirmed trades clogging up back offices.

According to data released by UK-based Markit Group, average outstanding confirmations in the OTC derivatives markets jumped from around 6000 per dealer bank to about 13,000 between June and August 2007, at the same time as monthly trading volumes rose from an average of around 20,000 to more than 25,000 per dealer.

However the situation has improved over the past few months. Following a dip at the end of 2007, trading volumes rose again to near-peak levels of 25,000 trades per dealer for each of the first three months of 2008, but the average number of outstanding confirmations remained lower at around 7000 per dealer per month.

But despite the improving picture, regulators are still concerned about operational inefficiencies in the credit derivatives markets. Last month the Federal Reserve Bank of New York said the volume surges in mid-2007 showed that "processing challenges" still persist in the markets and warned that in order to support long-term growth "the processing infrastructure must be capable of processing transactions efficiently through periods of sustained high volume and market volatility".

A recent report from the Financial Stability Forum also cited the surge in unconfirmed credit derivatives trades during the credit crunch as an area of concern.

"Despite the significant progress that the industry has made in automating the infrastructure of the OTC derivatives markets during the last two years, the industry has not achieved a "steady state" in which spikes in trading volume do not lead to operational problems," says the FSF report.

Earlier this month reports surfaced that group of at least 10 major credit derivatives brokers are working to establish a central clearing house that would take direct exposure to counterparty risk.

According to a Reuters report Athanassios Diplas, chief risk officer for global credit trading at Deutsche Bank, told the annual meeting of the International Swaps and Derivatives Association (ISDA) that the clearing house would help "take a lot of risk out of the system" by enabling banks to trade without the fear that the default of a dealer could cause a shock to the market.

Some bank executives and analysts have voiced concerns that the default of a major derivatives broker could lead to a chain of counterparty failures and defaults, says the report.

It is thought the central clearing house would require counterparties in credit default swaps to put up collateral as well as initial margin to cover any decline in market value.

The brokers involved in the programme would contribute to a guarantee fund for the clearing house to cover potential losses from defaults, says the report.

Source URL: http://www.finextra.com/fullstory.asp?id=18377
Publish Date: April 23, 2008