Markit to launch multi-dealer valuations platform

UK market data vendor Markit Group is working with six Wall Street banks to launch a global, multi-bank, cross-asset client valuations platform.

The Markit Valuations Manager platform will provide electronic delivery of daily OTC derivative and consensus cash valuations from Citi, Credit Suisse, Goldman Sachs, JPMorgan, Merrill Lynch and UBS alongside Markit's own independent valuations.

Recent regulatory and accounting changes have increased the importance of reliable, independent valuation sources for funds, says Markit and the new platform will provide the buy side with an "accurate, efficient tool to handle the increased regulatory and accounting burden".

The new system will also enhance the integrity of position information, counterparty marks and third-party valuations, says the vendor.

"Regulators around the world are increasingly focused on the importance of greater transparency, establishing best practice for client valuations, and a trusted, independent process is key," says Jeff Gooch, EVP and head of valuations and trade processing, Markit.

David Lefferts, managing director at Markit, will lead the new initiative.

The platform is expected to launch in the second half of 2008 with core coverage of bonds and derivatives. Markit says the system will subsequently be expanded in phases to include more banks and all major cash and derivative asset classes, including structured instruments such as asset-backed and mortgage-backed securities.

In recent weeks both Nyse Euronext and Reuters have launched valuations services for asset management portfolios of complex and structured financial products.

Source URL:http://www.finextra.com/fullstory.asp?id=18117

Publish date: February 21, 2008

Aite Reveals Top 10 Investment Trends for 2008

Just in case your firm's IT managers aren't looking forward, Aite Group is doing it for them. The Boston-based research and advisory firm released its top 10 securities and investments trends for 2008. Among the hot topics this year will be OTC derivatives processing, international market fragmentation, data integration and aggregation, and corporate actions processing.

While industrywide enhancements have been made in processing OTC derivatives in recent years, there still is much room for improvement, according to Aite. But 2008 will see innovation in the trading, clearing and settlement of OTC derivatives across asset classes, notes the report.

Further, Aite believes the Markets in Financial Instruments Directive (MiFID) and the inevitable changes to European market structure in 2008 will receive increased attention in 2008. Specificaly, the viability of multilateral trading facilities and systematic internalizers will be under close scrutiny, the firm says.

According to Aite, the top technology priority in 2008 for Wall Street will be data integration and aggregation, with the industry spending more than $2.5 billion on enterprise data management and integration technologies, a category that is growing 20 percent a year. Aite notes, however, that many of these spending initiatives lack the flash necessary to sell to senior management and will end up pork-barrelled in other projects.

Additionally, the financial industry at large should be looking to get a handle on corporate actions processing, or what Aite calls "the last frontier in straight-through processing and risk-reduction efforts." Corporate actions departments are beginning to shed their cost center images and are being viewed as an opportunity to drive efficiency and create a competitive advantage by improving client service, the firm contends, adding that software vendors are likely to try to capitalize on this shift.

Top 10 Investment Trends For 2008

1. Subprime Goes Prime-Time
2. Continued Expansion of Electronic Trading
3. Socially Responsible Investing
4. Market Fragmentation in Europe and Asia
5. Data Integration
6. ETFs and Other Low-Cost Alternatives
7. Outsourcing: All Talk Becomes a Little Action
8. Self-Directed for Cost and Competition
9. RIA Space Sees Double-Digit AUM Growth
10. Corporate Actions a Legimitate Priority

Note: Trends are listed in no particular order

Source URL - http://www.financetech.com/showArticle.jhtml?articleID=206800367

Publish date:February 19. 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

Derivatives Processing Will Attract More Dollars, Attention in 2008

CHALLENGE: As OTC derivatives grow increasingly popular, accurate pricing and risk evaluation is more important than ever. Automating derivatives processing also will be a priority in 2008 -- not just for efficiency's sake, but also to help firms mitigate market volatility.

One of the biggest originators, Merrill Lynch, took a huge writeoff for its losses and ousted its CEO. "This summer certainly highlighted ... the complexity of dealing with products that are hard to value," Bailey notes. The need has never been greater for buy- and sell-side firms to invest in technology to keep their derivatives involvement as immune to market volatility as possible. Implementing analytics software that can help with better pricing and risk evaluation, and accurate and timely trade capture and processing, will be top priorities in 2008.

Where the Industry Is Now: As a result of the CDO fiasco, some of the work that had been going on to automate derivatives processing (particularly the DTCC's Deriv/Serv and Trade Information Warehouse for processing and storing derivatives contracts) suffered a setback, and attention shifted toward technology that helps price derivatives, assess their risk and capture trade details. At the SIBOS conference in October, delegates discussed the need to get to T+30 -- the ability to process derivatives within 30 days. "The OTC market has evolved in a very inefficient way, and we're trying to automate big parts of it," Bailey says.

Focus in 2008: Broker-dealers will continue to urge clients to use Deriv/SERV. However, some dealers still need to make sure their software can read and produce Financial products Markup Language (FpML) so that it speaks what is becoming the common language of derivatives. Buy-side firms will upgrade their technology, especially those that plan to invest more heavily in derivatives. Some will turn to outsourcing or hosted solutions so that they don't have to build in-house.

Industry Leaders: The so-called "Fed 14" -- the 14 broker-dealers that promised the Federal Reserve in 2005 they would remedy their derivatives processing backlogs of up to 90 days -- are probably the furthest along in derivatives automation.

Technology Providers: DTCC, SwapsWire, T-Zero, CreditMatch, Markit and Thomson Tradeweb all have been evolving their derivatives technology offerings. Several vendors, some new to the space, introduced derivatives processing offerings at SIBOS in October: Content management system vendor Interwoven launched DealConnect for DTCC, which lets buy-side firms and broker-dealers connect with the DTCC's Deriv/SERV Trade Information Warehouse; Wall Street Systems unveiled a hosted back-office clearing and settlement system; Document Sciences and Volante Technologies announced a partnership to automate the production and transmission of trade confirmations over a range of messaging systems; and Message Automation and City Networks launched Proactive Derivatives, a solution for automating post-trade management of OTC derivatives.

Software that enables model-based pricing, from vendors such as Numerix, Quantifi and Maplesoft, will be big this year as firms strive to bring more intelligence to their derivatives investments. Software that helps match documents between counterparties and handle the workflow of derivatives, such as Document Sciences' offering, also will be considered.

Price Tag: According to Bailey, dealers spent $610 million on IT just for credit derivatives in 2007. "There have been a lot of setbacks, but I see sell-side firms spending around $740 million on credit derivatives technology next year," he predicts.

Source URL: http://www.wallstreetandtech.com/showArticle.jhtml?articleID=204203549
Publish Date: November 26, 2007

Ucits III Drives Demand for Independent Valuation

Société Générale Securities Services (SGSS) has rolled out Xenomorph's TimeScape data management solution in response to mushrooming demand for more complex financial instruments among buy-side firms seeking independent valuation services.

Société Générale Securities Services (SGSS) has rolled out Xenomorph's TimeScape data management solution in response to mushrooming demand for more complex financial instruments among buy-side firms seeking independent valuation services.

SGSS has integrated the data management system in its derivatives operations support services, which the fund administrator offers to asset management clients in a five-year deal. The data management services provided by TimeScape, including the independent valuation of structured derivatives products and risk management support, are in demand as a result of the EU's Undertakings for Collective Investment in Transferable Securities III (Ucits III) directive. The pan-European legislation has extended the range of financial instruments in which funds are able to invest.

Rachid Lassoued, head of financial engineering at SGSS, says the firm last year witnessed "surging demand" for independent valuation services for complex derivatives products, chiefly among buy-side firms. Investment banks are also requesting the services for their insurance, corporate and fund management clients, says Lassoued.

"In the past, buy-side firms relied on the counterparty's valuation services in a trade. There was no independent check. Also, every time you have a crisis, there is an incentive for firms to go to independent valuation services," says Lassoued.

"The growth in more sophisticated financial instruments among buy side firms is the driver. More asset managers are using derivatives," says Xenomorph CEO Brian Sentance.

TimeScape's validation capabilities are also utilized to control and cleanse multiple sources of market and instrument data for use by other downstream systems.

SGSS began integrating the TimeScape solution earlier this spring with Summit, the fund administrator's front-to-back office system for derivatives. Officials from both parties decline to disclose the value of the deal.

Source URL: http://www.watersonline.com/public/showPage.html?page=printer_friendly&print=637354
Publish Date: 1 November, 2007

Thunderhead to automate FpML processing for OTC trades across SwiftNet

UK-based Thunderhead has signed a partnership agreement with financial industry network Swift aimed at simplifying OTC derivative post-trade processing across the SwiftNet platform via the use of industry standard FpML messaging.

Thunderhead says its ability to generate FpML (Financial products Markup Language) output - combined with its support for DTCC's Deriv/Serv's OTC derivatives matching service and trade information warehouse - enables Swift members to dramatically simplify the process of generating electronic trade confirmations and achieve automated trade matching.

The vendor's XML adapter for Deriv/SERV provides an interface that allows users to quickly define and generate accurate FpML messages for delivery across the Swift network.

"The combination of Swift's broad reach of network and services infrastructure, combined with Thunderhead's extensive support for creating and delivering FpML, speeds the deployment and implementation of FpML to both the buy-side and sell-side participants to improve operational efficiencies and reduce operating costs," says Glen Manchester, CEO of Thunderhead.

"The need to streamline the trade confirmation process and reduce operational risk across a vast spectrum of asset classes is increasing dramatically," adds Fabian Vandenreydt, head of broker dealer and pre-settlement services for Swift. "Thunderhead's experience in helping financial services firms manage STP in derivatives trading makes them a welcome addition to Swift's partner community."

Last year US investment bank Morgan Stanley implemented Thunderhead's document generation technology to help automate the creation of OTC derivative trade confirmations.

Source URL:http://www.finextra.com/fullstory.asp?id=17467

Publish Date:21 September, 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