Swift announced today that Barclays Global Investors and Brown Brothers Harriman were the first asset manager and custodian to exchange FpML (Financial products Markup Language) based Contract Notifications over SWIFNet.
The following week, State Street on behalf of PIMCO and other customers began testing FpML communication with Bank of New York, Mellon Bank, Northern Trust and State Street Corporation.
SWIFT has launched the SWIFTNet FpML programme, in cooperation with ISDA (the International Swaps and Derivatives Association) earlier this year. This initiative seeks to automate OTC derivative post-trade processing. By using SWIFTNet FpML the industry players will be able to manage the rapidly growing volumes in the OTC derivatives market in a more efficient way.
"Our successful test is evidence of Brown Brothers Harriman's commitment to improving STP and reducing risk for our clients' derivatives activity," said Cherie Graham, Head of Brown Brothers Harriman's Derivatives Product Group. "We are excited to play a key role in helping the industry move forward with making derivative trade automation a reality through the FpML format."
Steve Goswell, Director, Barclays Global Investors, a strong advocate for automation and standardisation in the asset management community, said, "Barclays Global Investors is building a strategic platform to support the growth in OTC derivative volumes. With the help of SWIFT we have a global, secure, and reliable transport mechanism."
"This industry initiative will become an additional vehicle for improving the STP handling of OTC derivatives and help to mitigate the settlement risk for these products," said Terry Randall, senior vice president of State Street Corporation.
The first phase of SWIFTNet FpML involves transporting contract notification messages between asset managers and custodians. Later phases involve additional market participants, such as dealers and additional services, including trade confirmations and portfolio statements.
"This initiative brings the industrial strength and reach of SWIFTNet to the OTC Derivatives processing area, complementing our existing post-trade messaging services for the FX, equities and fixed income spaces," said Fabian Vandenreydt, Acting Head, Securities Industry Division, SWIFT.
Source URL - http://finextra.com/fullpr.asp?id=16055
Published Date - July 07, 2007
Friday, July 20, 2007
Monday, July 16, 2007
Germany Jumps at Derivatives
New regulations open opportunities, but strict risk management rules force asset managers to overhaul their front offices.
For the first time, fund managers in Germany are taking on a wider variety of derivatives to boost investment returns, but stringent new risk management guidelines call for radically revamping front-office systems, which could delay the launch of funds that comply with the regulations.
Financial regulators in Germany have always viewed derivatives with a cautious eye. While securities regulator Bafin does not share the view of investment guru Warren Buffet—who famously described the instruments as "financial weapons of mass destruction"—it had until recently only allowed asset managers in Germany to invest in derivatives to hedge risk exposure within their portfolios.
This all changed with the introduction of the Derivatives Regulation (Derivateverordnung) in February 2004, which came into force in conjunction with the Investmentgesetz (InvG) legislation. The Derivatives Regulation allows fund managers to invest in the full spectrum of derivatives products. But to do so they must obey strict risk management rules, which place limits on market risk and counterparty risk and require fund managers to install management and control systems in the front office to monitor the increased risks associated with derivatives. The funds had an adjustment period, which lasted until February this year.
Philippe Carrel, global head of alternative investments at Reuters in New York, says asset managers in Germany have "jumped at the chance" to begin updating their front-office risk management systems to comply with the rules.
Carrel says increasing pan-European competition in the asset management industry has given German fund managers a strong incentive to offer their institutional clients the opportunity to invest in derivatives and structured products. The European Union's Undertakings for Collective Investment in Transferable Securities (Ucits) III directive has extended the range of financial instruments in which funds are able to invest and introduces a "European passport" system to facilitate cross-border activity within the European Union. This opens up opportunities for hedge funds and asset management firms based outside Germany to vie for market share with the country's leading fund managers.
"This [Ucits III] is a new deal," Carrel says. "You are going to see old business models going out of the window and new business models starting to flourish. A passport-free Europe is becoming a reality. If you are an asset management firm that does not offer German investors market-neutral funds [which contain derivatives], someone else will do it."
Risk Control
Frankfurt-based Metzler Investment built a new risk control department to comply with the Derivatives Regulation in early 2006, using a risk management system developed by RiskMetrics. The Frankfurt-based asset manager, which has €30 million ($40 million) under management in a variety of equity and corporate bond funds, took a year and a half to make the risk and control department fully operational.
"Before the derivatives rules we did not need to carry out value-at-risk (VaR) calculations. Now we have to monitor the quality of VaR calculations on a daily basis through back-testing," says Ruth Boettcher, head of risk management at Metzler Investment.
Metzler's risk control department is split into various teams. The original risk management team, which consists of three people, carries out VaR calculations and stress-tests the portfolio. This involves the use of historical simulations and Monte Carlo simulations. The risk team works alongside a data management team, which consists of three people, and a legal and compliance team comprising four people.
"You have to develop all the interfaces to internal systems—it was hard work," says Boettcher. "If you have a new product, you have to route it from the back to front office and into the risk management system to make sure [it is compliant with the regulations]. We have a big IT team and we are working every day on the interfaces because we need a lot of automation in order to avoid manual processes."
In addition to carrying out daily VaR calculations on investment portfolios, fund managers have to obey strict rules on pre- and post-trade transactions to ensure they do not fall outside the regulations. Front-office systems must monitor a fund's exposure to individual stocks and share-price indexes, currencies, and bond issuer and counterparty credit risk. Asset management software company Aquin Group and financial services software provider Charles River Development are among the vendors helping German fund managers comply with these rules.
Aquin Group has installed its MIG21 Global Investment Compliance system at several major asset management firms in Germany, including DWS, a subsidiary of Deutsche Bank, Union Investment, Allianz DIT and Com Invest.
Charles River has installed its Investment Management System (IMS) at six institutional and retail asset managers in Germany. Siegfried Huegemann, senior account implementation manager at Charles River, says the IMS—which incorporates n-tier service-oriented architecture to support front- and middle-office systems—enables vendors to meet three sets of compliance rules: legal and regulatory rules laid down by Bafin, contractual or mandate rules dictated by a client, and internal rules based on a fund manager's asset allocation models.
"The Derivatives Regulation sits between two components of risk—first and foremost the credit risk, and also market risk," Huegemann explains. "If you have a serious violation, you have to report it to Bafin. Quite often, asset managers have to manage as many as 25 different portfolios and they are not sure if they do comply with the regulations or not. Our system checks against a fund manager's account positions and lets the company know if an order violates the regulation's compliance rules."
Huegemann declines to name the asset management firms that have incorporated the IMS software into their systems, but he uses the example of a fund manager investing in exchangeable bonds to demonstrate how the system works. "Asset managers have to consider both market and credit risk. A fund could have a 10 percent limit on the value it can invest in a single issuer within its portfolio, such as Daimler Chrysler. This limit is dictated by the regulatory rules," he says..
"If the firm already has an 8 percent stake in Daimler Chrysler, it may wish to buy an exchangeable bond issued by BMW that can be exchanged against shares of Daimler Chrysler. The details of the BMW bond and the exchange rate can then be input into Charles River's IMS, enabling the asset management company to control the total issuer concentration of Daimler Chrysler. This enables it to avoid violating the InvG rules limiting exposure to a single issuer to 10 percent. The asset manager can increase the issuer concentration of Daimler Chrysler by an additional 2 percent only."
Huegemann says IMS can be adapted to meet the specific needs of an asset management firm, which may obtain trading data and instrument data from a variety of providers such as Reuters or Bloomberg. "We can adjust to the client's environment and integrate with it accordingly. To that end, we can also do pre- and post-trade compliance according to a predefined set of rules for particular security types, regardless of the data set. Without such an open system, it would be challenging to change predefined compliance rules when the regulatory landscape changes," he says.
However, Reuters' Carrel says German fund managers' primary challenge is integrating risk management processes into their internal and external systems. "Ensuring connectivity with order management systems, order routing, prime brokers and different execution venues is critical. Today, fund managers have systems for exchange-traded products that need to be updated to account for over-the-counter derivatives instruments as well. It is not just a case of buying a system and getting into a trade. You have to be able to aggregate risk and valuations. There is the control of static data. You have to change the workflow to have a single view of OTC and exchange trades in one place," he says.
Carrel expects these technical obstacles to hamper German firms' ability to launch funds containing derivatives. "It will be a struggle to start off with this year. Typically, firms get into a business, see the issues and then update systems and workflow. It is usually a much more reactive process," he says.
Source - http://www.watersonline.com/public/showPage.html?page=457147
Publish Date - July 1, 2007
For the first time, fund managers in Germany are taking on a wider variety of derivatives to boost investment returns, but stringent new risk management guidelines call for radically revamping front-office systems, which could delay the launch of funds that comply with the regulations.
Financial regulators in Germany have always viewed derivatives with a cautious eye. While securities regulator Bafin does not share the view of investment guru Warren Buffet—who famously described the instruments as "financial weapons of mass destruction"—it had until recently only allowed asset managers in Germany to invest in derivatives to hedge risk exposure within their portfolios.
This all changed with the introduction of the Derivatives Regulation (Derivateverordnung) in February 2004, which came into force in conjunction with the Investmentgesetz (InvG) legislation. The Derivatives Regulation allows fund managers to invest in the full spectrum of derivatives products. But to do so they must obey strict risk management rules, which place limits on market risk and counterparty risk and require fund managers to install management and control systems in the front office to monitor the increased risks associated with derivatives. The funds had an adjustment period, which lasted until February this year.
Philippe Carrel, global head of alternative investments at Reuters in New York, says asset managers in Germany have "jumped at the chance" to begin updating their front-office risk management systems to comply with the rules.
Carrel says increasing pan-European competition in the asset management industry has given German fund managers a strong incentive to offer their institutional clients the opportunity to invest in derivatives and structured products. The European Union's Undertakings for Collective Investment in Transferable Securities (Ucits) III directive has extended the range of financial instruments in which funds are able to invest and introduces a "European passport" system to facilitate cross-border activity within the European Union. This opens up opportunities for hedge funds and asset management firms based outside Germany to vie for market share with the country's leading fund managers.
"This [Ucits III] is a new deal," Carrel says. "You are going to see old business models going out of the window and new business models starting to flourish. A passport-free Europe is becoming a reality. If you are an asset management firm that does not offer German investors market-neutral funds [which contain derivatives], someone else will do it."
Risk Control
Frankfurt-based Metzler Investment built a new risk control department to comply with the Derivatives Regulation in early 2006, using a risk management system developed by RiskMetrics. The Frankfurt-based asset manager, which has €30 million ($40 million) under management in a variety of equity and corporate bond funds, took a year and a half to make the risk and control department fully operational.
"Before the derivatives rules we did not need to carry out value-at-risk (VaR) calculations. Now we have to monitor the quality of VaR calculations on a daily basis through back-testing," says Ruth Boettcher, head of risk management at Metzler Investment.
Metzler's risk control department is split into various teams. The original risk management team, which consists of three people, carries out VaR calculations and stress-tests the portfolio. This involves the use of historical simulations and Monte Carlo simulations. The risk team works alongside a data management team, which consists of three people, and a legal and compliance team comprising four people.
"You have to develop all the interfaces to internal systems—it was hard work," says Boettcher. "If you have a new product, you have to route it from the back to front office and into the risk management system to make sure [it is compliant with the regulations]. We have a big IT team and we are working every day on the interfaces because we need a lot of automation in order to avoid manual processes."
In addition to carrying out daily VaR calculations on investment portfolios, fund managers have to obey strict rules on pre- and post-trade transactions to ensure they do not fall outside the regulations. Front-office systems must monitor a fund's exposure to individual stocks and share-price indexes, currencies, and bond issuer and counterparty credit risk. Asset management software company Aquin Group and financial services software provider Charles River Development are among the vendors helping German fund managers comply with these rules.
Aquin Group has installed its MIG21 Global Investment Compliance system at several major asset management firms in Germany, including DWS, a subsidiary of Deutsche Bank, Union Investment, Allianz DIT and Com Invest.
Charles River has installed its Investment Management System (IMS) at six institutional and retail asset managers in Germany. Siegfried Huegemann, senior account implementation manager at Charles River, says the IMS—which incorporates n-tier service-oriented architecture to support front- and middle-office systems—enables vendors to meet three sets of compliance rules: legal and regulatory rules laid down by Bafin, contractual or mandate rules dictated by a client, and internal rules based on a fund manager's asset allocation models.
"The Derivatives Regulation sits between two components of risk—first and foremost the credit risk, and also market risk," Huegemann explains. "If you have a serious violation, you have to report it to Bafin. Quite often, asset managers have to manage as many as 25 different portfolios and they are not sure if they do comply with the regulations or not. Our system checks against a fund manager's account positions and lets the company know if an order violates the regulation's compliance rules."
Huegemann declines to name the asset management firms that have incorporated the IMS software into their systems, but he uses the example of a fund manager investing in exchangeable bonds to demonstrate how the system works. "Asset managers have to consider both market and credit risk. A fund could have a 10 percent limit on the value it can invest in a single issuer within its portfolio, such as Daimler Chrysler. This limit is dictated by the regulatory rules," he says..
"If the firm already has an 8 percent stake in Daimler Chrysler, it may wish to buy an exchangeable bond issued by BMW that can be exchanged against shares of Daimler Chrysler. The details of the BMW bond and the exchange rate can then be input into Charles River's IMS, enabling the asset management company to control the total issuer concentration of Daimler Chrysler. This enables it to avoid violating the InvG rules limiting exposure to a single issuer to 10 percent. The asset manager can increase the issuer concentration of Daimler Chrysler by an additional 2 percent only."
Huegemann says IMS can be adapted to meet the specific needs of an asset management firm, which may obtain trading data and instrument data from a variety of providers such as Reuters or Bloomberg. "We can adjust to the client's environment and integrate with it accordingly. To that end, we can also do pre- and post-trade compliance according to a predefined set of rules for particular security types, regardless of the data set. Without such an open system, it would be challenging to change predefined compliance rules when the regulatory landscape changes," he says.
However, Reuters' Carrel says German fund managers' primary challenge is integrating risk management processes into their internal and external systems. "Ensuring connectivity with order management systems, order routing, prime brokers and different execution venues is critical. Today, fund managers have systems for exchange-traded products that need to be updated to account for over-the-counter derivatives instruments as well. It is not just a case of buying a system and getting into a trade. You have to be able to aggregate risk and valuations. There is the control of static data. You have to change the workflow to have a single view of OTC and exchange trades in one place," he says.
Carrel expects these technical obstacles to hamper German firms' ability to launch funds containing derivatives. "It will be a struggle to start off with this year. Typically, firms get into a business, see the issues and then update systems and workflow. It is usually a much more reactive process," he says.
Source - http://www.watersonline.com/public/showPage.html?page=457147
Publish Date - July 1, 2007
Credit Markets Eye Automation
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
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
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
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