Industry leaders who attended a market summit on over-the-counter (OTC) derivatives operations in London are urging major credit derivatives dealers to band together and form a central clearing agent to clean up a market where regulators want to see transaction processing become more automated.
The service could be based upon a structure similar to SwapClear, which was launched in September 1999 by London-based clearinghouse LCH.Clearnet to provide clearing for plain vanilla OTC interest rate swaps, according to the panel of three senior representatives from the buy side and sell side and an industry clearing and settlement service.
"Any one of the major prime brokers [in the credit derivatives market] could take that leap of faith and suggest operating a clearing house," says Chris Bentley, head of operations at London-based hedge fund Cairn Capital, which manages portfolios worth $30 billion. "This could potentially be done just for their clients to start off with and if this started a precedent, others may join to form a consortium of banks operating the system. This will reduce the logistics of confirmation matching payments. You would give all your trades to the clearinghouse and match them off," he adds.
Major dealers in the credit derivatives market—which include Bank of America, Citi, Goldman Sachs and JPMorgan—have already taken steps to make transaction processing more automated, such as confirming a higher percentage of trades electronically and adopting new functionality from electronic clearing and settlement firms such as the New York-based Depository Trust & Clearing Corp. (DTCC).
The big backlog in unconfirmed trades in the credit derivatives market—which stemmed from manual processes at banks with some dealers still using pieces of paper to register trades—first fell under regulatory scrutiny in September 2005 when Timothy Geithner, president of the Federal Reserve Bank of New York, spearheaded a drive to clean up the backoffice processes of 14 of the largest dealers in the market. The 14 banks have since reduced backlogs on outstanding confirmations by more than 80 percent.
However, Val Wotton, vice president, equity derivative and structured products documentation at Citigroup, points out that investment firms will face further technical challenges if they are to integrate their trade processing systems with an external clearing agent.
"There are issues around matching workflow and your internal workflow management. How do you actually internally control your documents and your payments and then leading on from there, how do you then process them to an industry client solution such as one provided by SwapClear. There are also questions around how you link back into your internal systems and close the loop," says Wotton.
New York-based electronic brokerage Creditex's credit derivatives trade processing platform T-Zero—which offers market participants a messaging system for the electronic affirmation of credit default swap trades—was also suggested by the summit panel as a possible centralized clearing agent in the future.
However, Bill Hodgson, first vice president derivatives services at the DTCC, says the fragmented buy-side market presents a challenge to the development of "focused" buy-side services. "It is not hard to build a platform. Getting people to use it is a different matter," he says.
"An integrated approach needs 300 buy-side firms to come to the table. Unless there is some form of an industry forum for the buy side [to express their view] we are not going to have that," says Bentley.
Hodgson says the exchange and cash markets have taken decades to formulate integrated trade processing systems. "Generally, firms buy solutions that plug into their food chain. In derivatives, SwapClear and T-Zero have bits of the food chain. Even though we are working quickly on the trade information warehouse for credit, I think it will be quite some years before you see a mature and comprehensive global settlement solution that is integrated across all OTC asset classes by one provider," he says.
Meanwhile, global regulators continue to monitor the infrastructure used by major industry dealers to process equity, interest rate and commodity derivatives. The New York Fed announced in May that 18 major market participants in the equity derivatives market had made progress in automating post-trade processing infrastructure. Dealers have succeeded in reducing equity derivatives confirmation backlogs by 25 percent in the period from November 2006 to Jan. 31 of this year.
Source - http://www.watersonline.com/public/showPage.html?page=457137
Publish date - July 1, 2007
Monday, July 16, 2007
Thursday, June 28, 2007
Northern Trust expands OTC derivatives trading services
Northern Trust has expanded its services for over-the-counter (OTC) derivatives trading to include independent valuation of a comprehensive array of derivatives for its custody, fund administration and investment operations outsourcing clients.
The automated solution links to third-party specialist providers of OTC derivatives valuations and utilizes a system of tolerance checks to arrive at optimum pricing and performance measurement for the complex financial instruments.
"Independent valuation has become a crucial piece of the derivatives puzzle as institutional investors seek portfolio transparency to meet internal risk and compliance goals, as well as emerging regulation and industry best practices," said Judson Baker, product manager for derivatives processing related services at Northern Trust. "For our 'best of breed' approach, Northern Trust has selected independent pricing firms specializing in a range of swaps and options. Each provider has an extensive history in running market-standard valuation models, and Northern Trust brings them together in a cost-effective solution with coverage across broad product types."
In addition to independent valuation, Northern Trust's derivatives processing initiative includes automated collateral management for OTC derivatives trades under International Swaps and Derivatives Association (ISDA) master agreements. The suite of services, integrated with Northern Trust's global infrastructure, provides end-to-end processing including calculation of exposures, making and receiving of collateral calls, managing collateral according to the terms of the credit support agreement, legal agreement documentation management, reconciliation and settlement.
"As volumes and product complexity in OTC derivatives continue to grow, so too do demands for independent valuations and greater transparency around these asset types," said Stephen Andress, global head of derivatives operations. "Northern Trust is continuously working to enhance its processing capabilities for derivatives, allowing our clients to create a tailored service solution that integrates foreign exchange, cash management, derivatives clearing and other complementary services to support their diverse investment strategies."
Publish Date: June 28, 2007
Source URL:http://www.finextra.com/fullpr.asp?id=15844
Thursday, June 21, 2007
The subprime meltdown, continued - Bearish turns
American shares and bonds wobbled as two hedge funds managed by Bear Stearns came close to collapse after suffering heavy losses in the subprime mortgage market.
Read the full article at Economist.com - http://www.economist.com/printedition/displaystory.cfm?story_id=9378742
Publish Date: June 21, 2007
Source: The Economist
Read the full article at Economist.com - http://www.economist.com/printedition/displaystory.cfm?story_id=9378742
Publish Date: June 21, 2007
Source: The Economist
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
Celent - OTC derivatives to reach USD550trn by 2008
Over-the-counter derivatives will exceed the USD550trn mark in 2008, up from USD375trn at the end of 2006, according to a new report from Celent, a research and consulting firm that focuses on the application of information technology in the global financial services industry.
Source URL:http://www.hedgeweek.com/articles/detail.jsp?content_id=112472
Growing OTC derivatives trading volume, escalating exposure to OTC derivatives and structured deals, the increased complexity of products and lack of trade automation have increased the importance of accurate valuation, according to the report, entitled Risk and Pricing Analytics: Addressing Valuation Challenges in OTC and Structured Products.
Recent losses suffered by Amaranth Advisors and Bank of Montreal illustrate the risks associated with the use of derivative instruments, according to Celent, and bring to light the need to address inappropriate valuation practices and insufficient management oversight.
The report says pricing and valuation of financial assets are core to a financial institution's existence and tied to the stability of the financial sector as a whole, and therefore getting it right is crucial.
'As a whole, the determination of fair market value for the positions that make up a complex trade, fund, or portfolio is, more often than not, fraught with complications,' says Celent analyst Cubillas Ding, the author of the report. 'Complexities often arise from multi-layered product valuation requirements, the fault-prone use of spreadsheets, and the transparency of valuation processes.'
To address this situation, he says, vendors have adopted different 'routes to market' for pricing analytics. Solutions are differentiated along several lines: specialised versus mixed asset models, coverage across various parts of the OTC and structuring lifestyle, scope of vendors' analytics, and the quality of partnerships related to market data, integrated trading, and risk management systems.
Ding says that institutions implementing pricing solutions need to weigh the level of granularity required for their OTC derivatives and structured products valuation activities, the type and nature of users, and time-to-market considerations in the context of the availability of internal resources. 'Each approach trades off granularity, end-user focus, and time to market,' he says.
Source URL:http://www.hedgeweek.com/articles/detail.jsp?content_id=112472
Thursday, May 17, 2007
Unexpected Surge in Trading Volumes and Volatility Raises Infrastructure Concerns for Hedge Funds
In the wake of the rising volumes, computer glitches and capacity shortages experienced during the market's brutal decline in late February, hedge funds are reevaluating their systems and capacity needs, according to several industry consultants and IT service providers. After Feb. 27, when the stock market dropped 416 points and there were market data lags at Dow Jones & Company and slowdowns at the New York Stock Exchange, it's not surprising that hedge funds are reviewing their infrastructures to ensure they can perform in a more-volatile market.
Consultants and service providers say most large hedge funds were not impacted by the volatility in late February in terms of executing their orders and getting back position reports. "Larger firms that have invested in technology and operations have a robust technology infrastructure," says Jayesh Punater, CEO of Gravitas Technology, an IT services firm in New York that provides consulting, software development and systems integration for the alternative investment community. "Not only were they better able to cope with the market [decline], they were able to cope with market dynamics."
Still, hedge funds are concerned about their applications and the capacity of their infrastructures to withstand heavy trading volumes, say sources. "On a macro-level it definitely pushed people [who rely on automated trading] to look at capacity not only within infrastructure, but sustaining speed when capacity gets pushed," says Greg Treacy, director of U.S. sales at Neonet, an agency broker that provides direct-market-access trading to hedge funds and other buy-side firms.
Business as Usual?
Even prior to the recent market volatility, hedge funds that attract investments from institutional investors were focusing on business continuity and disaster recovery (see related article, page 21). "When volatility strikes, you can feel the tension around making sure the operations are up and running," says Jim Loy, managing director at Gravitas. "There's definitely a link between volatility and the business continuity and disaster recovery curve."
Now hedge funds also are looking to beef up the real-time applications that generate reports on the funds' current investments and power their ability to perform "what if" scenario analysis on their holdings. These tools can be "nicely integrated with accounting systems and OMSs [order management systems] to allow the portfolio manager to make decisions," Gravitas' Punater says.
Some funds are setting up internal data warehouses so that they can generate their own reporting infrastructure and look at risk across portfolios, adds Loy, who previously was head of infrastructure at Tiger Management, a leading hedge fund in the late 1990s, and subsequently worked in Morgan Stanley's prime brokerage business. "It truly simplifies the job of the operations departments as to what's the overall P&L for the firm, and there's attribution to different portfolio managers," Loy says. "It also gives hedge funds control over their data without being locked into canned reports," he explains. "You're not beholden to a vendor and you can slice and dice your data."
Another area of concern is the back-office "plumbing," such as making sure "the Microsoft applications and the e-mail and business continuity are robust so they are able to deal with huge volumes in trading," adds Gravitas' Punater. As hedge funds grow larger and they expand into multiple strategies and products, they are finding that their back offices have not kept up with their rapid growth in assets, he explains. In particular, hedge funds are focusing on accounting and back-office processing of trades, Punater observes, noting that investors also are demanding that funds have robust back-office recovery plans. In addition, "[Funds] are also having a hard time getting the data to the portfolio managers," the Gravitas CEO asserts. "They may need to reengineer or re-architect their operations."
Small Firms, Big Problems
Small hedge funds, which comprise the bulk of the industry, have the most issues to deal with, as most have not invested in robust systems and could be running their positions and reconciling trades in spreadsheets, warn industry consultants and vendors. Out of the total universe of 9,000 hedge funds (or 13,000, as some studies report), there are only about 400 or 500 that have robust infrastructures, estimates Sameer Shalaby, CEO at Paladyne Systems, a provider of a hosted front-to-back-office technology for the hedge fund community. "The bulk of the market has little or no technology infrastructure," he contends.
Typically, only funds with $1 billion or more in assets can afford a strong infrastructure, according to Shalaby. They don't get to be a multibillion-dollar fund without investing in infrastructure, as institutional investors require this as part of the due-diligence process, he notes.
But the bulk of the industry's assets are in the smaller hedge funds that can't afford to build their own infrastructures, Shalaby continues, and these funds may "start cutting corners" by doing some things on spreadsheets, or wait until next year to invest in an accounting system or order management system. "They'll definitely cut corners to manage costs until they have capital to deploy the infrastructure," Shalaby says.
But having the right risk-management systems in place is critical, particularly during volatile trading periods. "You can't fly a plane without radar, and in trading, some of these players have hundreds if not thousands of positions, and if you don't have a good risk-management system, you don't know what you're risks are," says Steven Harrison, president and COO of Imagine Software, which offers Derivatives.com, a real-time hosted risk management system that aggregates positions from multiple prime brokers.
To tap functionality they otherwise may not be able to afford, most of these smaller hedge funds rely on their prime brokers to supply their technology, which usually includes connectivity to execution venues, market data and software to manage their positions. But, "The moment the hedge fund adds a second prime broker, it finds out the technology that one prime broker provides cannot aggregate the positions of the second prime broker," relates Gravitas' Punater. While some prime brokers offer a service to aggregate the data from the other primes, it's not in the interest of the hedge fund to let one prime broker see all of its positions and risk revealing its proprietary strategies, which is why the fund has multiple prime brokers in the first place, he notes. But if hedge funds can't consolidate all of their positions, they may not be aware of their overall risk, Punater stresses. Clearly, this could raise risks for the fund's clients, he adds.
A Little Help, Please
Rather than face these IT infrastructure challenges on their own, many hedge funds are turning to solution providers that can offer an integrated hosted infrastructure with all the components that the hedge fund needs as well as sufficient backup capabilities. "The idea is to supply a hedge fund with all the technology it needs to run its business, taking care of redundancy, disaster recovery requirements and all the connectivity to markets," says Paladyne's Shalaby. For its hedge fund OMS, Paladyne partners with other vendors, including NYFIX for order routing and market connectivity, Reuters for market data, and Advent's Geneva for derivatives accounting. "Our clients could frankly trade from an Internet cafe if they had to access their portfolios," Shalaby contends.
Such bullet-proof capabilities are becoming a competitive differentiator for hedge funds. According to Shalaby, one reason hedge funds are reacting to the recent market turbulence is that they are facing scrutiny from institutional investors that are asking about the resiliency of the funds' infrastructures and how they performed under previous emergencies, such as 9/11. "These are now becoming standard due-diligence questions," Shalaby says. "If you were down and you're competitor was up, then guess what, I'd rather invest with your competitor."
Publish Date:Apr 30, 2007
Source URL: http://www.wallstreetandtech.com/showArticle.jhtml?articleID=199200266
Consultants and service providers say most large hedge funds were not impacted by the volatility in late February in terms of executing their orders and getting back position reports. "Larger firms that have invested in technology and operations have a robust technology infrastructure," says Jayesh Punater, CEO of Gravitas Technology, an IT services firm in New York that provides consulting, software development and systems integration for the alternative investment community. "Not only were they better able to cope with the market [decline], they were able to cope with market dynamics."
Still, hedge funds are concerned about their applications and the capacity of their infrastructures to withstand heavy trading volumes, say sources. "On a macro-level it definitely pushed people [who rely on automated trading] to look at capacity not only within infrastructure, but sustaining speed when capacity gets pushed," says Greg Treacy, director of U.S. sales at Neonet, an agency broker that provides direct-market-access trading to hedge funds and other buy-side firms.
Business as Usual?
Even prior to the recent market volatility, hedge funds that attract investments from institutional investors were focusing on business continuity and disaster recovery (see related article, page 21). "When volatility strikes, you can feel the tension around making sure the operations are up and running," says Jim Loy, managing director at Gravitas. "There's definitely a link between volatility and the business continuity and disaster recovery curve."
Now hedge funds also are looking to beef up the real-time applications that generate reports on the funds' current investments and power their ability to perform "what if" scenario analysis on their holdings. These tools can be "nicely integrated with accounting systems and OMSs [order management systems] to allow the portfolio manager to make decisions," Gravitas' Punater says.
Some funds are setting up internal data warehouses so that they can generate their own reporting infrastructure and look at risk across portfolios, adds Loy, who previously was head of infrastructure at Tiger Management, a leading hedge fund in the late 1990s, and subsequently worked in Morgan Stanley's prime brokerage business. "It truly simplifies the job of the operations departments as to what's the overall P&L for the firm, and there's attribution to different portfolio managers," Loy says. "It also gives hedge funds control over their data without being locked into canned reports," he explains. "You're not beholden to a vendor and you can slice and dice your data."
Another area of concern is the back-office "plumbing," such as making sure "the Microsoft applications and the e-mail and business continuity are robust so they are able to deal with huge volumes in trading," adds Gravitas' Punater. As hedge funds grow larger and they expand into multiple strategies and products, they are finding that their back offices have not kept up with their rapid growth in assets, he explains. In particular, hedge funds are focusing on accounting and back-office processing of trades, Punater observes, noting that investors also are demanding that funds have robust back-office recovery plans. In addition, "[Funds] are also having a hard time getting the data to the portfolio managers," the Gravitas CEO asserts. "They may need to reengineer or re-architect their operations."
Small Firms, Big Problems
Small hedge funds, which comprise the bulk of the industry, have the most issues to deal with, as most have not invested in robust systems and could be running their positions and reconciling trades in spreadsheets, warn industry consultants and vendors. Out of the total universe of 9,000 hedge funds (or 13,000, as some studies report), there are only about 400 or 500 that have robust infrastructures, estimates Sameer Shalaby, CEO at Paladyne Systems, a provider of a hosted front-to-back-office technology for the hedge fund community. "The bulk of the market has little or no technology infrastructure," he contends.
Typically, only funds with $1 billion or more in assets can afford a strong infrastructure, according to Shalaby. They don't get to be a multibillion-dollar fund without investing in infrastructure, as institutional investors require this as part of the due-diligence process, he notes.
But the bulk of the industry's assets are in the smaller hedge funds that can't afford to build their own infrastructures, Shalaby continues, and these funds may "start cutting corners" by doing some things on spreadsheets, or wait until next year to invest in an accounting system or order management system. "They'll definitely cut corners to manage costs until they have capital to deploy the infrastructure," Shalaby says.
But having the right risk-management systems in place is critical, particularly during volatile trading periods. "You can't fly a plane without radar, and in trading, some of these players have hundreds if not thousands of positions, and if you don't have a good risk-management system, you don't know what you're risks are," says Steven Harrison, president and COO of Imagine Software, which offers Derivatives.com, a real-time hosted risk management system that aggregates positions from multiple prime brokers.
To tap functionality they otherwise may not be able to afford, most of these smaller hedge funds rely on their prime brokers to supply their technology, which usually includes connectivity to execution venues, market data and software to manage their positions. But, "The moment the hedge fund adds a second prime broker, it finds out the technology that one prime broker provides cannot aggregate the positions of the second prime broker," relates Gravitas' Punater. While some prime brokers offer a service to aggregate the data from the other primes, it's not in the interest of the hedge fund to let one prime broker see all of its positions and risk revealing its proprietary strategies, which is why the fund has multiple prime brokers in the first place, he notes. But if hedge funds can't consolidate all of their positions, they may not be aware of their overall risk, Punater stresses. Clearly, this could raise risks for the fund's clients, he adds.
A Little Help, Please
Rather than face these IT infrastructure challenges on their own, many hedge funds are turning to solution providers that can offer an integrated hosted infrastructure with all the components that the hedge fund needs as well as sufficient backup capabilities. "The idea is to supply a hedge fund with all the technology it needs to run its business, taking care of redundancy, disaster recovery requirements and all the connectivity to markets," says Paladyne's Shalaby. For its hedge fund OMS, Paladyne partners with other vendors, including NYFIX for order routing and market connectivity, Reuters for market data, and Advent's Geneva for derivatives accounting. "Our clients could frankly trade from an Internet cafe if they had to access their portfolios," Shalaby contends.
Such bullet-proof capabilities are becoming a competitive differentiator for hedge funds. According to Shalaby, one reason hedge funds are reacting to the recent market turbulence is that they are facing scrutiny from institutional investors that are asking about the resiliency of the funds' infrastructures and how they performed under previous emergencies, such as 9/11. "These are now becoming standard due-diligence questions," Shalaby says. "If you were down and you're competitor was up, then guess what, I'd rather invest with your competitor."
Publish Date:Apr 30, 2007
Source URL: http://www.wallstreetandtech.com/showArticle.jhtml?articleID=199200266
Thursday, May 03, 2007
WS&T News - Wall Street and DTCC Bring Derivatives Processing into 20th Century
At the SIFMA show today, Frank De Maria, global head of derivative client services and operations at Merrill Lynch, offered an interesting quote from Alan Greenspan, made six weeks ago: “I was shocked to find credit derivatives speculation and clearing operated with 19th century technology.” He was talking about trades being handled by phone, fax and paper. De Maria then Googled other 19th century inventions and found the stapler, barbed wire, dynamite and the zipper among them. Point being, it's time for modernization. Merrill Lynch and 13 other Wall Street firms have been working with the DTCC to build a data warehouse for derivatives, such that all derivatives trading data are in one place and there's one "golden copy" of every trade record.
"There will still be fails, but you will know the source of every fail," De Maria says. "You can proactively manage a fail, where today it's reactive."
So far, 850 firms are participating in the data warehouse, which is called Deriv/SERV. That includes 500 hedge funds, 150 asset managers and one custodian, according to Janet Wynn, managing director of the DTCC. "We will run heavy user acceptance tests this year," she says.
The DTCC also hopes to add other types of instruments to the warehouse as well.
In a separate session, Noland Cheng, managing director of Morgan Stanley and chairman of SIFMA's operations committee, said the committee is working to build an industry data warehouse that will combine records processing for different types of investments, reduce overhead effort for a lot of firms, and help regulators perceive the industry as efficient.
Publish Date: May 03, 2007
Source URL: http://www.wallstreetandtech.com/blog/archives/2007/04/wall_street_and.html
"There will still be fails, but you will know the source of every fail," De Maria says. "You can proactively manage a fail, where today it's reactive."
So far, 850 firms are participating in the data warehouse, which is called Deriv/SERV. That includes 500 hedge funds, 150 asset managers and one custodian, according to Janet Wynn, managing director of the DTCC. "We will run heavy user acceptance tests this year," she says.
The DTCC also hopes to add other types of instruments to the warehouse as well.
In a separate session, Noland Cheng, managing director of Morgan Stanley and chairman of SIFMA's operations committee, said the committee is working to build an industry data warehouse that will combine records processing for different types of investments, reduce overhead effort for a lot of firms, and help regulators perceive the industry as efficient.
Publish Date: May 03, 2007
Source URL: http://www.wallstreetandtech.com/blog/archives/2007/04/wall_street_and.html
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