T-Zero releases credit derivatives processing technology

T-Zero, the most widely adopted credit derivative affirmation platform, has released its next generation 'Novations+' processing technology.

The new technology is fully integrated with the DTCC Trade Warehouse and directly addresses the new industry commitments announced by the Operations Management Group (OMG).

The launch of Novations+ also comes amid renewed calls from U.S. Treasury Secretary Henry Paulson and from regulators, including the Federal Reserve Bank of New York, for additional scale, automation and standardization in credit derivative processing.

Novations+ functionality enables buy-side and sell-side market participants to achieve 2008 novation targets set by the OMG to submit novation requests via an electronic platform rather than via email.

Additionally, the new technology allows the credit derivative industry to scale novation processing by providing system-to-system connectivity, interoperability and automation for even the most complex novation operations involving prime brokers and fund allocations. Such operations are not currently automated by any other industry platform.

"Novations+ represents the next big technology shift in the automation of credit derivative processing," said Mark Beeston, President of T-Zero. "The new platform is uniquely positioned to address scaleability issues highlighted by the OMG and Secretary Paulson." According to Beeston, key elements of Novations+ functionality include:

• Electronic novation request directly from Warehouse records using T-Zero GoldSync+^ TM
• Industry standard novation workflow to allow novation consent on T+0
• Automation that promotes industry standards including ISDA Novation Protocol II
• Point-and-click support for complex novation operations including:
  • Block novation of trades originally allocated across multiple funds
  • SuperBlock^TM novation of an entire trading position composed of multiple trades
  • Partial novations where only a percentage of the original notional is transferred
  • Prime broker 3-party "stay-in" and 4-party "step-out" novations
• Global front-office distribution of novation functionality via Bloomberg Professional

In a little more than two years since launch, T-Zero has been adopted by over 180 buy-side firms and most major dealers and prime brokers. The platform's open architecture integration framework, known as AgnosticConnectivity^TM , has allowed it to API-connect directly to the front-office systems of dealers and prime brokers as well as buy-side firms. The model allows T-Zero to provide counterparties with real-time notification of trade details and T+0 resolution of trade-entry errors via industry standard electronic workflow.

"Our clients recognize the need for scaleability to accommodate growth," said Clive de Ruig, Head of T-Zero, North America. "Novations+ was developed in collaboration with our dealer and buy-side clients to dramatically improve the industry's ability to handle exponentially increasing trade volumes."

"We are very pleased to have implemented Novations+," said Tetsuya Akutsu, Senior Vice President, Mizuho Alternative Investments, LLC. "We are using it to fully automate our novation processing and to improve our operational efficiency with the major dealers."

"We have been a T-Zero user for well over a year now and it has clearly improved operational efficiency and reduced risk," said Paul Winter, Head of Derivatives Operations at Fortis
Investment Management. "We have evaluated many platforms and some are still developing what has been on T-Zero all along. Novations+ is a significant leap beyond anything else that is out there."

Source URL: http://www.finextra.com/fullpr.asp?id=20607

Publish Date: 28 March, 2008

InterContinental Exchange Acquires Yellow Jacket Software to Expand its Electronic Trading of OTC Derivatives

Exchanges are moving into OTC derivatives as these instruments become more standardized and can trade on exchange-like electronic platforms.

With an eye on expanding its market share in over-the-counter derivatives, Atlanta-based InterContinental Exchange will acquire YellowJacket Software, an electronic trade negotiation platform that traders use to consolidate quotes and structure complex trades in the weather and energy markets. In light of the huge volumes that occur in the OTC derivatives markets, few observers are surprised by the move.

"Exchanges want to get a piece of the OTC market back," observes TABB Group senior analyst Kevin McPartland, who covers the futures and options exchanges. "The OTC markets have exploded -- they see that they are losing some potential business to the collective OTC markets, and they want to make sure they keep that trading on their exchanges and on their technology." McPartland adds that technology has become an increasingly important competitive differentiator for all exchanges.

In fact, technology has been the basis of the ICE's rapid expansion and acquisition of other exchanges, including the International Petroleum Exchange (IPE), the New York Board of Trade and the Winnepeg Commodities Exchange. The ICE operates three futures exchanges in the U.S., Europe and Canada, and has expanded its trading and clearing activities into a full range of energy, soft commodities, foreign exchange and stock index futures.

Today, ICE provides a single high-speed, electronic platform for trading ICE futures and OTC-cleared products. It offers one architecture that supports futures and one that supports OTC markets, according to an ICE spokeswoman.

With the acquisition of Yellow Jacket, for which financial details were not disclosed, the ICE now has the potential to tap the liquidity from the OTC weather, natural gas, crude and power derivatives that are transacted on Yellow Jacket's network. While "ICE operates a widely distributed electronic trading platform for highly liquid products, Yellow Jacket serves the highly structured instruments and illiquid trades," says the ICE spokeswoman. "Certainly Yellow Jacket occupies a very interesting space in the technology side of the derivative market."

Founded in 2002, Yellow Jacket's core application is YJEnergy, a secure, peer-to-peer communications network used by OTC derivatives traders that rely on public instant messaging networks, such as Yahoo and AOL, to disseminate quotes to one another. "A trader at any given moment may have several instant messages coming in," explains the ICE spokeswoman. "This tool enables them to aggregate information and assemble where market prices are for the trade they want to do." The platform provides the added value of price transparency, the ICE spokeswoman notes.

Currently, 130 clients use the YJEnergy product, including big hedge funds, banks, utilities and power companies. The ICE, however, is looking at how it can leverage the technology beyond energy and weather derivatives. "We see this not just as an energy or commodities tool, but it could potentially apply to complex asset-class trades, such as fixed income instruments negotiated OTC," says the ICE spokeswoman, who adds that Yellow Jacket will be a wholly owned subsidiary of ICE.

One of the potential synergies between the ICE and Yellow Jacket is clearing. According to the ICE spokeswoman, Yellow Jacket currently submits OTC trades for clearing to several exchanges. "We're integrating that ... [into] ICE's cleared products," she says.

Liffe, SuperDerivatives Connect

But the ICE isn't the only exchange that is venturing into technology deals to penetrate the OTC derivatives space. On Feb. 26, Liffe, the London-based futures exchange owned by NYSE Euronext, partnered with SuperDerivatives to give users of the derivatives pricing and analysis platform direct access to the Liffe Connect electronic trading platform. "The partnership was driven by market demand from market makers and from buy-side investors who are looking for the right market to realize their investment goals," says Ed Crouch, global head of corporate and strategic development for SuperDerivatives.

Banks, brokers, asset managers and mutual funds use the SuperDerivatives products to price OTC derivatives. Now, market participants can access Liffe's direct execution capabilities and market data, while combining that with the analytical and productivity functionality that SuperDerivatives brings to the table with its platforms, says Crouch.

"There are certain structures that can be traded on the exchange, and that's the right venue, and there are other structures that can't because they are OTC structures," explains Crouch. "This gives [customers] a single platform so that people can choose what the best execution venue is for whatever it is they are trading at the moment." For example, if a trader were executing a back-to-back trade, for which he had an exchange-traded product on one side and an OTC product on the other side, he could execute both on the Liffe/SuperDerivatives platform, Crouch adds.

In addition to facilitating direct execution via Liffe Connect, the interaction of the two platforms "provides greater transparency and price discovery in that market participants can use the technology to have a greater sense of what appropriate prices are in these different venues," Crouch asserts, noting that while Liffe is the first exchange to which SuperDerivatives has linked, the vendor is in discussions to link to other exchanges. "The idea is that it helps increase volume on the exchanges," he says.

Still, Liffe can trade only listed derivatives, points out Mayiz Habbal, SVP of Celent's securities and investments group. "With this kind of linkage, Liffe is not going into the OTC buisness," he says, "SuperDerivatives is giving its users the option -- if they need to diversify their strategies, they can go into the listed derivatives. [The deal] is a connectivity provisioning more than anything else."

OTC, Exchange Convergence?

Habbal and other industry sources see the technology deals such as the ICE's acquisition of Yellow Jacket and SuperDerivatives' partnership with Liffe as leading to the convergence of the OTC derivatives and exchange markets. According to Habbal, the exchanges are trying to move into the OTC derivatives business dominated by interdealer brokers (IDBs). "[Exchanges] are preparing themselves to really venture into that market that the IDBs are operating electronically," he says.

The combination of electronic trading, more standardization of OTC derivatives contracts and the consolidation of the IDBs are fueling the convergence of OTC and exchange-traded environments, argues Habbal. An estimated 75 percent of the OTC derivatives market, he notes, is handled by three IDBs -- Tullett, ICAP and GFI. "And within the standardized instruments [i.e, credit default swaps and short-dated interest-rate swaps] they are the equivalent of running exchanges," Habbal maintains, citing the findings of a Celent research report, "Interdealer Brokers' Migration to an Exchange-like Platform," that was slated for publication in late February.

In the report, Celent divides OTC derivatives into three categories: First, they are introduced as exotic or illiquid instruments; then they evolve into liquid or flow instruments; and finally, they migrate into an exchange-type of environment, according to Celent. "Once the instruments become standardized and more liquid, they can be traded electronically," Habbal contends.

"For the exchanges, they see this as their next market," Habbal adds. "They're looking at how the interdealer brokers who specialize in this type of instrument have transformed their environment into an exchange."

As evidence of the trend, TABB's McPartland notes that the Chicago Board Options Exchange (CBOE) recently launched an electronic platform for trading Flex options, which basically are customized single-stock and index equity options that allow traders to create options with custom price strikes and expirations. While CBOE used to execute the Flex options through the floor, now brokers, liquidity providers and their customers can negotiate trades securely via CLFEX, an Internet-based, fully anonymous trading system developed for CBOE by Stockholm-based Cinnober Financial Technology. The system is based on Cinnober's TRADExpress Trading Engine and also utilizes the OTC platform Ctrade.

In yet another sign that OTC derivatives may be converging with exchange markets, on Feb. 28 Nasdaq OMX announced a $7.5 million stake in Agora-X, a new electronic communications network (ECN) for institutional commodities trading in energy and agricultural products. "The OTC trades are a complement to the exchange-traded products," says Chris Concannon, Nasdaq OMX's EVP of transaction services. But there are unique benefits to OTC products, he adds. For example, "You don't have the same position limits and restrictions that you find on exchange contracts," Concannon says.


Source URL: http://www.financetech.com/showArticle.jhtml?articleID=206905693
Publish Date: 25 March, 2008

Sell Side to Spend $70 Million on Derivatives Processing in ’08, Buy Side Far Less, Says TABB Group

The TABB Group forecasts that top-tier broker/dealers will ramp up spending on OTC derivatives processing automation software at a compound annual growth rate of 30% over the next two years.

In a research note published today, "OTC Derivatives Processing: Blazing a Trail to Automation," the TABB Group says that although top-tier, sell-side broker dealers have invested millions of dollars since the mid-1990s developing best-of-breed processing for their burgeoning OTC derivatives businesses, many other counterparties, including mid-tier banks, hedge funds and other trading firms, have yet to implement any kind of automated solution, a problem that has not gone unnoticed by the Federal Reserve.

According to Kevin McPartland, senior analyst at TABB Group and author of the note, "When the Fed first instructed major dealers in 2005 to catch up on unconfirmed trades, additional personnel provided most of the ammunition for shrinking the confirmations backlog. As recent credit market turmoil has shown, simply adding staff to solve a problem is insufficient." He goes on to explain that during a three-month period, June to August 2007, the total number of backlogged confirmations jumped 250%.

Although the technology exists for real-time monitoring, he points out, "many firms continue to rely on daily, even weekly, reports because it's often difficult and expensive to implement more frequent tracking." This forces the major dealers to weigh the cost of additional staffing and enhanced automation with the level of risk they are willing to carry. For years, the front office quants and traders always gained the attention of senior management, IT staffs and independent service providers for trading systems, high-speed data and algorithms that stole the spotlight and budget. "For OTC derivatives," McPartland says, "a new day has finally dawned. A process so critical and complicated, it is simply screaming out for automation."

McPartland also explains that credit default, interest rate and equity swaps transactions not handled by electronic confirmation platforms, averaging about 1,000 transactions per firm per month, continue to be handled through paper-based confirmations. In addition, almost all non-vanilla trades, averaging as many as 4,000 transactions per month for the largest firms, also use paper-based confirmations. Creating these confirmations is one of the most crucial steps in the trade lifecycle, "but without the right solution," he says, "it can be the most complicated. In fact, one major investment bank estimated that nearly 90% of its non-vanilla OTC derivative trades are still sent by fax."

TABB Group forecasts that the $70 million to be spent on OTC derivatives processing automation software in 2008 will experience a compound annual growth rate of 30% over the next two years, bringing the overall market size to nearly $120 million by 2010. In addition, with vendor installations to manage the post-trade capture process costing over two million dollars each in licensing fees, market size for the sell side alone, says McPartland, is approaching $30 million annually and as OTC derivative volumes increase, this will rise to over $45 million annually.

Unfortunately, while nearly 1,000 of the world's hedge funds use OTC derivatives, only a fraction of those have automated processing systems. Combining increased usage with existing users still in need of processing systems, TABB Group forecasts the market for software packages for hedge funds at nearly $40 million annually by 2010, rising from only $20 million in 2007.

By Penny Crosman

Source URL - http://www.financetech.com/showArticle.jhtml?articleID=206904327
Publish Date - 18 March, 2008

Spending on OTC derivatives automation to surge - Tabb

Banks will spend $70 million on automating over-the-counter (OTC) derivatives processing in 2008, rising to $120 million in 2010 - a compound annual growth rate (CAGR) of 30%, according to estimates from Tabb Group.

In a research note Tabb says that, whilst top-tier, sell-side broker dealers have invested heavily in developing processing for OTC derivatives, many other counterparties, including mid-tier banks, hedge funds and other trading firms have yet to implement any kind of automated system.

OTC derivatives processing has suffered in recent years as banks diverted budgets to trading systems, high-speed data and algorithms, says Tabb.

Tabb identifies hedge funds as particularly slow on the up-take with nearly 1000 trading OTC derivatives, but only a fraction of these using automated processing systems. Tabb forecasts the market for software packages for hedge funds will reach nearly $40 million by 2010 - double the figure for 2007.

Kevin McPartland, senior analyst, Tabb, says when the Federal Reserve first instructed dealers to clear settlement backlogs and tighten back office risk management procedures in 2005, most firms invested in extra staff to deal with backlogs.

But McPartland argues that the credit crunch shows employing extra personnel is not enough to solve the problem.

Despite technology existing for real-time monitoring "many firms continue to rely on daily, even weekly, reports because it's often difficult and expensive to implement more frequent tracking", says McPartland.

He says credit default, interest rate and equity swaps transactions not handled by electronic confirmation platforms - averaging about 1000 transactions per firm per month - continue to be handled through paper-based confirmations. In addition, almost all non-vanilla trades - averaging as many as 4000 transactions per month for the largest firms - also use paper-based confirmations.

"For OTC derivatives a new day has finally dawned. A process so critical and complicated, it is simply screaming out for automation," says McPartland.

Tabb's research comes a year after the Bank for International Settlements called on financial firms to introduce automated systems to cut confirmation backlogs in the over-the-counter derivatives markets.

The Committee on Payment and Settlement Systems, the public policy forum of the central bankers' collective, called for improvements across the complete post-trade environment in the booming OTC markets.

Source URL - http://www.finextra.com/fullstory.asp?id=18234
Publish date - 18 March, 2008

Tullett Prebon Signs on to Derivatives Platform

Inter-dealer broker joins T-Zero

Confirming recent predictions that sell- and buy-side firms will escalate their spending on derivatives processing, London-based Tullett Prebon, a voice and electronic inter-dealer broker in the global derivatives market, agreed today to use T-Zero's platform for post-trade straight-through processing of derivatives.

Tullett Prebon is the third inter-dealer broker to join the T-Zero platform, which provides capture, affirmation, allocation, novation and termination of trades to inter-dealer brokers, buy-side firms, prime brokers and service providers.

By Penny Crosman

Source URL: http://www.wallstreetandtech.com/showArticle.jhtml?articleID=206904996
Publish date: March 20, 2008

Nasdaq OMX Invests in Agora-X OTC Derivatives ECN

Expanding into the fast growing market for derivatives, Nasdaq OMX is investing up to $7.5 million for a 20 percent stake in Agora-X, LLC, a new electronic communications network for institutional trading in over-the-counter (OTC) commodity contracts.

Agora-X is a subsidiary of FCStone, a commodities risk management firm in Kansas City that is developing the new electronic marketplace to automate the phone-based OTC market.

"Certainly agricultural derivatives and energy derivatives are the hot area," says Chris Concannon, EVP of Nasdaq OMX, the new global exchange and technology conglomerate formed by the combination of Nasdaq and the Swedish operator of stock and derivatives markets. The transaction closed on Wed., Feb. 27, a day before the Agora-X deal was announced.

"There is phenomenal liquidity in the OTC derivatives space and whenever you find that sort of liquidity, you can transition from the OTC to a central market function," says Concannon. In terms of creating synergies with its traditional customers, Nasdaq's large customers trade energy and agricultural contracts as agents or principal traders, but there's a broader customer base out there, says Concannon. Also some of Nasdaq's corporate issuers in those industries trade those products for hedging or speculative purposes.

Agora-X is going to be an electronic marketplace where buyers and sellers meet to match trades and pricing will be aggregated to provide a very transparent market in the given contracts, says Concannon.
Initially, the trading platform will handle option "look-alikes" in energy and agricultural commodities, as well as commodity swaps, with the scalability to add other OTC derivatives, according to the announcement.

While it qualifies as an OTC market because the contracts are not listed on an exchange, Concannon says, "It brings some of the pricing transparency and centralization of liquidity that any traditional market or exchange brings, says Concannon.

Nasdaq was introduced to Agora-X through its relationship with OMX, which approached OMX about licensing its technology. "It was only after further due diligence that we became interested in the strategic relationship," says Concannon. In January, Agora-X announced that OMX would provide a complete trading and hosting solution including licensing, customization, implementation and ongoing monitoring. The platform can do not only trading but clearing. The clearing can be done bilaterally (between two counterparties) or centrally.
"We're exploring both," says Concannon, adding that Agora-X could use a centralized clearing entity to provide counterparty risk.

Since Nasdaq will own 20 percent of the ECN, Agora-X will continue to remain a standalone subsidiary of the commodities firm with separate financials.

The investment is occurring at a time when oil and wheat prices are soaring and publicly traded exchange companies are looking to purchase derivatives exchanges. For instance, the CME Group is negotiating a potential merger with NYMEX.

The deal is Nasdaq's first foray into OTC derivatives in the U.S. market, but it's not the combined entity's first foray into futures and derivatives, notes Concannon. Stockholm-based OMX operates stock and derivatives exchanges in the Nordic and Baltic region. In December, OMX acquired Nord Pool, a Norwegian derivatives exchange for about $411 million, along with it's clearing and consulting operations. The two companies plan to create an international energy and carbon exchange to be called Nord Pool International in Oslo.

Even though Nasdaq is in the midst of launching its own U.S. equity options exchange and is expected to close on its $652 million acquisition of the Philadelphia Stock Exchange by the second quarter of 2008, which owns the third largest options exchange and PBOT, a futures exchange, it's kept its eye on other opportunities. "We have certainly been looking at the entire derivatives space for some time, not just equity options or index options," says Concannon.

Source URL: http://www.advancedtrading.com/showArticle.jhtml?articleID=206901057
Publish Date: 29 February, 2008