JPMorgan sacrifices CDS engine to open source in bid to stave off legislation

JPMorgan is to hand over its inhouse-developed CDS analytical engine to the International Swaps and Derivatives Association to run as an open platform in an effort to increase transparency in credit default swaps pricing and stave off legislation.

The CDS analytical engine, originally developed by the Quantitative Research group at JPMorgan, is widely used in the industry to price CDS contracts.

Isda says it will make the technology available as open source code, thereby increasing transparency around CDS pricing.

Robert Pickel, executive director and chief executive officer, Isda, describes the initiative as another measure of the industry's efforts to raise transparency and increase standardisation in CDS trading.

"JPMorgan has invested a lot of intellectual capital in this analytical engine," he says. "Its willingness to assign this to Isda for us to make it available as open source to the entire industry demonstrates our collective commitment to the integrity of the CDS product."

The move comes as Isda fights a draft US bill proposed by congressman Collin Peterson that would ban most forms of CDS trading.

"This bill would increase the cost and reduce the availability of essential risk management tools while failing to address the true causes of the credit crisis," says Eraj Shirvani, Isda chairman and head of European and Pacific credit sales and trading at Credit Suisse.

 

Source URL: http://www.finextra.com/fullstory.asp?id=19587

DTCC to Support All Central Counterparties for OTC Credit Derivatives

In an effort to bring greater certainty and safety to the market for credit derivatives, The Depository Trust & Clearing Corporation (DTCC) said it will support all central counterparty solutions for credit default swaps, in a non-discriminatory manner, with its Trade Information Warehouse, whose capabilities include central net settlement and asset servicing.

Through its DTCC Deriv/SERV subsidiary, the company is currently working with ICE Trust/The Clearing Corporation, CME/Citadel, LIFFE/LCH, and Eurex to facilitate their efforts to provide CCP services trade guarantees for credit default swaps (CDS). The Trade Information Warehouse, as the market's central registry and industry-recognized post-confirm infrastructure for credit derivatives, is optimally equipped to support any and all CCPs that are established in the CDS market. Virtually all dealers and buy-side participants along with 15 third-party service providers in the global CDS market are already linked to the Warehouse and utilize its functionality.

"From the outset of our involvement in the OTC derivatives market in 2003, DTCC has been committed to bringing automation, certainty and reduced risk to trading in CDS and other derivatives instruments," said Peter Axilrod, managing director, business development and Deriv/SERV, at DTCC, in a press release. "By utilizing the Warehouse's post-trade processing infrastructure rather than investing valuable resources to build their own, CCPs can achieve the objectives of CCP clearing, that is, to mitigate and mutualize counterparty risk and increase market liquidity, at the lowest cost and the greatest efficiency to their CCP members. Our support of CCP providers will give the industry standard centralized asset servicing across both cleared and bilateral trades," he said.

Source URL: http://www.wallstreetandtech.com/showArticle.jhtml?articleID=212800098

Hedge Funds Outsource to Independent Fund Administrators

With the events of last year in the credit markets and the Madoff scandal sounding another alarm bell, hedge funds are turning to independent fund administrators to validate the net asset value of their funds and calm investors.

Yesterday, Millennium Management LLC, a global multi-strategy investment management firm with over $13 billion in assets under management, said it outsourced fund administration to GlobeOp Financial Services. GlobeOp is an independent financial technology specialist that provides integrated middle and back-office, administration and reporting services to hedge funds and asset management firms.

"Given what's happened last year and given the Madoff situation, you can't be careful enough," commented Hans Hufschmid, CEO of Globe Op who is based in London.

While Millennium had used GlobeOp for independent valuation, share registry and transfer services for the Millennium International fund since 2006, the outsourcing firm received the expanded mandate a few weeks ago, said Hufschmid. "We'll do everything that is required to essentially verify the books and records, positions, trade records and valuations," said GlobeOp's chief executive.

Though Hufschmid said he had not see a position sheet, in general multi-strategy funds means a fund manager is trading all sorts of different strategies including equities and fixed income and most likely is involved with over-the counter derivatives. According to its Web site, Millennium allocates capital globally across a diverse set of strategies and asset classes including relative value/fundamental equity, merger arbitrage, futures/currency arbitrage, statistical arbitrage, options arbitrage and distressed investing.

Previously, Millennium did the fund administration itself. But there is pressure from investors to pick independent fund administrators, said Hufschmid. "You want someone else to trust and verify," he said, noting that the fund administrator must verify all the cash positions, trading positions and make sure the fund pricing is correct. Statements go out monthly to investors but the work of reconciliations and pricing goes on daily.

The independent fund administrator trend has been evolving for a while but has been pushed hard now by investors, he said. Investors are asking for an independent fund administrator for every hedge fund they make an investment in, said Hufschmid.This is common practice for a lot of hedge funds, but those that started more than 20 years ago, are doing their own investor reporting as a legacy operation. "Now they are basically getting inline with everybody else," said Hufschmid.

In a white paper released yesterday on hedge fund outsourcing strategies, Paladyne Systems wrote that fund administrators will play an increasingly important role in hedge fund outsourcing strategies, but they will need to expand their service offerings in client-facing technology, intra-day reporting and middle-office services to remain competitive. Paladyne predicted in the white paper that fund administrators would team up with turnkey-service providers to offer a "shared platform "combining technology with middle-office services.

While some fund administrators are owned by banks or prime brokers, Hufschmid said that his firm's independence is turning into a competitive advantage. "We don't hold securities. We don't trade securities. We are not in this business to do executions. We are in the business to provide middle back "office and fund administration services," he said, adding that the firm is "totally unconflicted."

 

Source URL:http://www.wallstreetandtech.com/showArticle.jhtml?articleID=212700968