T-Zero, Omgeo Respond to Call for Better Derivatives Processing

Derivatives and the way they're handled have been under the glare of the spotlight ever since the Fed's intervention in the Bear Stearns crisis, which was largely precipitated by the firm's highly leveraged credit derivatives positions. "These [over-the-counter derivatives] markets have grown tremendously; but the infrastructure has not kept up — and it must," said Treasury Secretary Paulson in mid-March. Last week, 18 major Wall Street players and three organizations (ISDA, MFA and SIFMA) sent a letter to Timothy Geithner, president of the Federal Reserve Bank of New York, in which they vowed to continue to automate credit and equity derivatives processing, including making consistent use of electronic confirmation platforms and submitting novation requests (replacing one obligation with another or replacing a party to an agreement with a new party) via electronic platforms rather than by email.

We knew it would only be a matter of time before derivatives processing platform vendors would come out with upgrades to meet these requirements So far, we've seen announcements from T-Zero and Omgeo for automating novations and repurchase agreements.

T-Zero addressed the novations requirement by rolling out Novations+ processing for its credit derivative affirmation platform. The new technology integrates with the DTCC's Trade Warehouse and enables buy-side and sell-side firms to submit novation requests electronically rather than by email, even for blocks of trades. T-Zero says it has more than 180 users who are buy-side firms, dealers and prime brokers.

Omgeo's announcement yesterday focused on repurchase agreements. The company announced that its customers can now process repurchase agreements and reverse purchase agreements through its TradeSuite platform, alongside U.S. equity and fixed income products through its Oasys TradeMatch trade confirmation service. Omgeo says the addition of repo functionality in TradeSuite is part of release 7.0, which gives trade counterparties the tools to enhance internal workflows and limit the use of paper in post-trade processing.

Source URL:http://www.financetech.com/showArticle.jhtml?articleID=207001550

Publish Date: 03 April, 2008

Fed warns of persistent processing problems in OTC derivatives market

Despite moves by the largest credit derivatives dealers to clear settlement backlogs, the major volume surges in mid-2007 showed that "processing challenges" still persist in the over the counter derivatives (OTC) markets, says The Federal Reserve Bank of New York.

However the Fed has welcomed new commitments by banks to streamline processing of credit and equity derivatives trades outlined in a letter to Fed president Timothy Geithner.

In the letter, dated 27 March, 18 Wall Street banks outline major operational goals for 2008, including consistent use of electronic confirmation platforms for eligible trades and the settlement of trades through a centralised process by September. The dealers also aim to have all novation requests submitted via electronic platforms, rather than e-mail, during the year.

"Our goal is a marketplace that matches its trades on trade date," states the letter.

Regulators originally met with the banks in September 2005 to voice concerns about risk management practices in the rapidly growing credit derivatives market. Following that meeting the banks pledged to automate and streamline operations and cut backlogs. The Fed says since then the dealers have reduced confirmations outstanding more than 30 days by 85%, increased electronic processing to more than 90% of all credit derivative trades and eliminated the risk of novations causing dealers not to know their counterparties.

But soaring volumes in the middle of last year again highlighted persistent processing problems in the OTC credit derivatives markets, says the Fed.

"To support long-term growth, the processing infrastructure must be capable of processing transactions efficiently through periods of sustained high volume and market volatility," says the regulator is a statement.

However the Fed says the bank's new commitments recognise that achieving this objective "requires end-to-end automation, increased interoperability and targeted improvements to the processing workflow".

See complete Fed document - http://www.finextra.com/finextra-downloads/newsdocs/NYfedletter0308.pdf

Source URL: http://www.finextra.com/fullstory.asp?id=18285
Publish Date: 01 April, 2008

Markit to Acquire Swapswire to Fortify OTC Derivatives Processing Infrastructure

UK data supplier Markit announced an agreement to acquire Swapswire, an electronic trade confirmation network backed by dealers for processing OTC derivatives. Financial terms were not disclosed. The acquisition is expected to close in early 2008.

The deal follows a string of acquisitions by Markit and solidifies Markit’s role as a powerhouse brand position in the derivatives space, comments Brad Bailey, senor analyst at Aite Group, in an email sent to the media. Markit, which is 70 percent owned by major derivatives dealers, provides pricing, a portfolio valuation service, trade processing of OTC derivatives through its acquisition of Communicator last year, and owns indexes. Last month, Markit bought out International Index Company (IIC), owner of the iTraxx Indexes and CDS IndexCo, which owns the CDX indexes.

“Swapswire has helped out a lot on the interest-rate swap confirmation process, “ says Bailey in an interview. “Most of the dealers use them and they’ve been getting a lot of traction on the equity derivatives side as well,” says Bailey. Interestingly, Markit is 70 percent owned by the major dealers derivatives dealer and Swapstream is 95 percent owned by the major derivatives dealers, notes Bailey.

Swapswire is an automated service, owned by 21 dealers, that allows market participants in the OTC derivatives markets to complete trade date confirmations immediately upon execution. Major dealers, inter-dealer brokers, prime brokers and buy-side institutions rely upon on the service.
In a statement, Markit said it plans to combine the Swapswire confirmation capabilities with its trade processing workflow platform to provide the OTC derivatives market with a cross-asset trade processing solution, critical mass and a global network. The enhanced platform will have over 200 buy-side institutions, 50 dealers and 45 inter-dealer brokers.

With the relentless growth in OTC derivatives, which has put pressure on operational infrastructure and raised regulatory concerns, Chip Carver, CEO of Swapswire, stated that the industry faces significant hurdles. By combining Swapswire and Markit together, “We will be able to provide the financial markets with the best possible tools to overcome these challenges,” Carver further stated in the release. The combined business will be co-headed by Jeff Gooch, EVP and head of trade processing and valuations at Markit and Carver.

According to statistics from the Bank for International Settlements (BIS), the OTC derivative markets grew by 25 percent in the first half of 2007, compared to 12 percent in the second half of 2006. Meanwhile, the average number of outstanding confirmations doubled year-on-year, according to Markit’s Quarterly Metrics report, which surveys operational data from the top 18 dealers. Markit says the aggressive volumes have led to mounting backlogs of unconfirmed trades, which attract regulatory scrutiny.

Bailey agrees, “There are still a lot of fundamental problems with derivatives processing such as front-office errors.” This summer’s credit crisis highlighted a lot of problems the market is having in terms of errors, he says.

In a statement, David Lown, EVP at PIMCO, which is a buy-side client of Markit’s comprehensive workflow services said, “the deal will be of immense value to the buy-side community. The integration of SwapsWire’s real-time confirmation tool into the Markit service will give us a cross-asset platform with electronic straight through processing, allowing us to support our growing OTC derivative businesses with greater operational efficiency,” added Lown.

Bailey said the combination of Markit and Swapswire “is a positive step from a buy-side perspective,” because buy-side institutions are confused about resource allocation decisions and which vendors will be around in the future. Also, Markit will eventually provide connectivity into two industry confirmation systems.

Through Communicator’s pipes, Markit provides the connectivity to DerivServ, the DTCC’s matching service for credit derivatives, says Bailey. However, Swapswire has not built connectivity to DerivServ, notes Bailey. Bailey says the deal positions Markit to offer connectivity to both Swapswire and DerivServ. “Their clients will be able to type trades into these two major utilities,” says Bailey.

Now that Swapswire will be part of market, it will make it easier for buy side firms to go to DerivServ or Swapswire because the connectivity will be provided through Markit, says Bailey. If this were to happen, PIMCO, which is a buy-side client of Markit’s workflow service, could do a trade and pump that to DerivServ (via Markit) and now they’ll own Swapswire, he says.

Source URL: http://www.wallstreetandtech.com/blog/archives/2007/12/market_to_acqui.html?cid=nl_wallstreettech_week
Publish date: December 05, 2007

OTC Derivatives Face Post-Trade Challenges

What will it take to automate the post trade landscape?

By Mayiz Habbal

The OTC derivative environment is burdened by volumes of paper, spreadsheets and phone calls associated with deal tickets, deal contracts, legal contracts and counterparty management. Growth in the derivative market has outpaced operational capacity and expertise. The nature of derivatives is a high degree of processing interdependency among market participants and continual development of new structures, as well as a dynamic life cycle subject to external events, such as defaults and trade transfers. The challenge for money managers and broker-dealers is to automate processing. Potentially, the next five years will be a new era of collaboration and technological creation, and an amazing race in which the finish line is a win for all.

The trading world is filled with interdependencies and short time frames with efforts geared to affirmations within a few days of trade execution. Money managers need to advise brokers of trade allocations before broker confirmations can be sent out. Lack of affirmation from a counterparty can create an opportunity for downstream delays in accurate payment. Further, hedge funds work with multiple prime brokers in order to protect confidentiality and mitigate risk. There are instances of relatively small firms with $100 million in assets under management using three prime brokers. The trading and operational challenges multiply.

It is estimated that up to 30 percent of OTC derivative trade confirmations contain an error(s) and require subsequent handling for rebooking or amendment. Most OTC derivative trading is conducted by phone or fax. The operational nightmare of backlogs, errors and staffing shortages are a reality for many firms. Industry market participants and regulators alike are concerned. The cumulative costs of errors and the potential trade exposures are too huge to ignore, particularly in light of the mainstreaming of the derivative market and the increase in cross-border trading. The global regulatory agencies more and more are coordinating their efforts to enhance not only local market stability but also global stability in the financial markets.

According to a previous Celent report on European post-trade processing, "The majority of respondents indicated that less than 50 percent of derivatives processing is automated. The lack of STP in derivatives was mainly attributed to the complexity of transactions and lack of standards. As a result, 35 percent of respondents cited derivatives as the No. 1 priority for STP projects as opposed to other instrument classes."

Buy Side Slow to Automate

What's clear to brokers -- and to many in the technology sector that service the brokers -- is that the buy side is not shifting to the automation paradigm as actively as is needed. Firms may delay because there are few multisecurity systems, there may be additional costs or they do not feel their volumes justify an additional technology implementation.

The buy-side purchaser of technology for derivatives processing is still a rare bird. A quick count of the leading providers in this space not affiliated with an execution platform show about 1,000 hedge funds and asset manager clients. Lack of adoption reflects the still relatively young technology. The buy-side community still is coping with front-office trade automation and other technology priorities, such as compliance, risk analytics and portfolio management systems for investment of derivatives.

The market likely is waiting for further advancements in the field, as well as its own derivative volume to increase in order to justify the expenditure. Many are simply relying on whichever processes and tools the broker-dealers provide. Looking to a broker-dealer to provide support and to adapt operational procedures based upon what is free in the market is common.

Unlike the broker-dealer community, which has greater technology and financial resources, most buy-side firms prefer to purchase technology that is multifunctional, product-neutral and designed to handle any security type. Many of the vendor solutions today are geared to a single type of security. Since the broker-dealer community is behind much of system development and firms typically operate in a silo structure, single-security systems are not as burdensome. Buy-side firms will postpone a shift to new technology if they believe the vendor market is in transition and are willing to make trade-offs even if the result is more manual labor. If existing systems provide some element of support, all the better -- and all the longer the postponement.

Growth and Lack of Standards

The derivative world is simultaneously coping with a growth boom and the need for standard protocols and procedures with agreement from a myriad of market participants. The key drivers to change are the broker-dealer community and organizations such as ISDA, DTCC Deriv/Serv and the regulatory agencies, as well as very large traditional asset managers and hedge funds. It is a collaborative effort that will take time but is launched on the heels of success in credit derivatives.

The general lack of broad buy-side adoption of third-party solutions to automate the post-trade/pre-settlement environment is partly a measure of progress of these leading figures. A quick count of the number of buy-side clients on leading applications not affiliated with an execution platform is about 1,000 firms -- not high, considering the thousands of money managers worldwide that might be dabbling in unlisted derivatives. DTCC Deriv/Serv, a key vendor in the trade confirmation service, has approximately 800 investment firms, and that figure has exploded from three years ago. Deriv/Serv has gained the greatest penetration in the credit market, although not universally across OTC derivatives.

So what is delaying broad adoption by the buy-side firms? Are they not as encumbered in the OTC derivative processing dilemma as the broker community?

Outside of active hedge funds with sophisticated strategies and traditional money managers of very large funds, the overall trade volume for the bulk of firms may be considered too small to warrant additional budget for these software applications. Firms are content to cope with manual processes on small trading volumes. Others just rely on free services, such as prime broker-provided Web portals. Given the size and interdependency in the markets, it might well be time for the buy side to make a greater contribution to industry problems.

In buying technology, most asset managers prefer to choose from a variety of competitive solutions that handle multiple products versus a single type of OTC derivative. Few are eager to be the first to sign up for a new solution. The buy side often adopts a wait-and-see approach to optimize expenditures on a clear leader or to allow enough time for the technology to evolve a generation. Buy-side firms also look at vendor reputation, and in a new technology sector such as post-trade/pre-settlement, where change still is occurring, it takes time to validate credentials.

However, vendor options will grow -- and soon. The sector is a long way off from commoditization, regulators are collaborating globally, and the brokerage community is determined to make the pain go away.

Mayiz Habbal is managing director of the Securities & Investments Group at Celent and is based in the firm's New York office. His areas of research focus on enterprise architectures and aligning business strategy with IT initiatives. He brings with him more than 15 years of experience in the management and development of software and engineering of IT strategies, predominantly in the investment banking industry. Before joining Celent, Habbal held positions with Oracle Siebel, Bank of America and Dresdner Kleinwort.

Publish Date - July 30, 2007
Source URL: http://www.financetech.com/showArticle.jhtml?articleID=201201909

PolarLake releases OTC derivatives trade lifecycle package

PolarLake has today launched a fully packaged over-the-counter derivatives trade lifecycle solution.

The solution is ideal for sell-side, buy-side, custodians and fund administrators.

Features of the solution are:

• ISDA compatible portfolio reconciliation, matching and reporting service, including out of the box reports for business users
• Support for FpML 4.2 & 4.3 standards
• Out of the box FpML semantic validation of the business meaning of trade data
• Ability to take inputs in any format (Excel, pdf, CSV, XML, etc.)
• Out of the box BPM support for trade lifecycle and exception management
• Data Analyst driven user desktop for configuring business rules
• Support for all derivative classes
• Out of the box integration with WS-CDL for choreography of trade flows
• Integration platform for connecting to SwapsWire, T-Zero, DTCC
• Easy integration solution for FpML onto SWIFTNet
• Business rules defined in open standards rule language XQuery

The key benefits to financial institutions of adopting PolarLake's OTC derivatives trade lifecycle solution are:

• Decreased costs and lower operational risk through automation of existing manual portfolio reconciliation processes
• Increased revenue through tailored, differentiated OTC derivatives trade services to clients
• Lower cost of integration over traditional coding of transformations
• Lower cost of maintenance based on PolarLake's ability to manage the complexity of FpML in an intuitive data centric manner
• Quicker on-boarding of new services such as SwapsWire and T-Zero

Commenting on the release, PolarLake CEO John Randles said, "PolarLake has been involved in the integration, reconciliation and process management of FpML based trades for many years. Our core platform is more suited to this problem than any other on the market due to our patented XML pipelining technology. And, with our experience in many implementations with companies like JPMorgan, Société Générale, Pioneer Investments and Dimensional Fund Advisors, we have been able to package a complete integration, reconciliation, matching and BPM solution for the OTC Derivatives market. Companies new to these asset classes are looking for solutions, not a series of technical problems. Companies already working with these asset classes are well aware of the technical and operational problems, currently addressed by expensive manual processes. These are problems we have already solved."

Publish date:July 23, 2007

Source URL:http://www.finextra.com/fullpr.asp?id=16240

Bear, Goldman and Lehman sign up to Markit OTC affirmation service

Markit, a provider of independent data, portfolio valuations and OTC derivatives trade processing, has launched a new electronic affirmation service within Markit Trade Processing (MTP). The first dealers to sign up are Bear Stearns, Goldman Sachs and Lehman Brothers.

The new service, which builds on Markit's existing affirmation model, is unique in its ability to electronically match trades between counterparties prior to confirmation. Alternative vendor affirmation solutions simply provide a connectivity mechanism that routes information between sell-side and buy-side firms.

MTP allows clients to reduce risk by automating the post-trade lifecycle for all OTC derivative instruments. Last month alone, the service processed in excess of 60,000 trades. MTP provides trade date affirmation and trade confirmation through industry utilities such as the Depository Trust & Clearing Corporation (DTCC). Markit sends more trades to the DTCC's Deriv/SERV platform than any other service provider.

Markit's platform also supports non-STP (Straight Through Processing) workflow, enabling clients to process paper confirmations in an automated, streamlined manner. This is particularly useful for processing equity derivatives which are likely to remain a hybrid environment of paper and electronic confirmation methods.

The launch of Markit's cross-asset electronic matching service coincides with a surge in demand for equity derivative processing solutions to tackle the backlogs building up in the asset class. A letter sent by the New York Federal Reserve to major market participants in May this year stated that "there remain significant challenges to automating the equity derivatives infrastructure…Additionally, dealers have not maintained the backlog reduction levels achieved in January 2007."

"As the derivatives market continues to grow substantially in both volume and complexity, our challenges associated with manual processing have also grown," stated Terrance Berland, Senior Managing Director at Bear Stearns. "We are quite excited about the potential that Markit's trade processing platform provides us to address these challenges across credit, rates and equities."

"The OTC derivatives markets continue to grow, and market particeet participants are very aware of the need for automation to achieve operational efficiency. Goldman Sachs and its clients require trade processing services that handle all types of OTC derivatives, including new instruments such as ABCDS and LCDS, seamlessly. We have very rigorous controls and processes, and chose Markit's trade processing service because it is the most comprehensive solution in the marketplace today," noted Bradford S. Levy, Managing Director at Goldman Sachs.

Jeff Gooch, Executive Vice President and Head of Processing and Valuations at Markit, said: "Having launched an affirmation service that connected counterparties twelve months ago, it became clear that funds and dealers operate in many different ways. Markit has therefore launched a new version of the service which is the first of its kind, allowing complete flexibility to cater for an institution's preferred operating method. By offering electronic matching prior to confirmation in addition to more traditional affirmation models, we enable our clients to meet their needs in equities, credit and rates, including meeting the new Fed targets for equity derivatives."

Publish Date: June 26, 2007
Source URL: http://www.finextra.com/fullpr.asp?id=15664