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
Monday, September 29, 2008
Friday, September 26, 2008
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
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
Tuesday, September 23, 2008
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
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
Wednesday, September 17, 2008
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
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
Tuesday, September 16, 2008
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
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
Thursday, September 11, 2008
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
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
Tuesday, September 09, 2008
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
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
Friday, September 05, 2008
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
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
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
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