DTCC rebates $3m to derivative dealer customers

The Depository Trust & Clearing Corporation's (DTCC) Deriv/SERV business announced today a record year of performance supporting the global over-the-counter (OTC) derivatives market, with transaction volume tripling in 2006 and DTCC providing a first-time rebate of $3 million to its global derivative dealer customers.

Key accomplishments for DTCC Deriv/SERV:

• Processing a record 2.6 million in transaction volume in 2006, a nearly three-fold increase from the 945,000 handled in 2005;
• Increasing matching and confirmation rates for credit derivatives trades (i.e. credit default swaps) to more than 80% in 2006 up from 15% in 2004 through Deriv/SERV. This increase has played a key role in addressing regulators concerns about improving efficiency and managing risk in the marketplace;
• Growing Deriv/SERV's global customer base to 753 global derivatives dealers and buy-side firms from 207 the prior year. DTCC has the largest community of users for post-trade processing in the OTC derivatives market. Deriv/SERV customers include all major derivatives dealers and a rapidly growing number of investment managers and hedge funds in 30 countries;
• Extending the Deriv/SERV service to include additional OTC credit, interest rate and equity derivative products, thereby giving the industry a fully-integrated, single gateway through which market participants can automate processing and reduce risk for a wide range of OTC derivatives products;
• Launching the Trade Information Warehouse to provide an automated central repository for tracking OTC derivatives contracts over their life cycle, which can extend for years. This large-scale global initiative was singled-out by global regulators (U.K.'s Financial Services Authority, U.S. Securities and Exchange Commission, Federal Reserve Bank of New York) in a September 2006 Financial Times Op-Ed as important in strengthening the "systems and risk" mitigants that exist in the market.

Driving Down Costs

"DTCC's vision is to help our OTC derivative customers minimize operational risk, lower costs and facilitate growth by delivering a centralized, borderless automated solution to process trades in this dynamic market," said Robert McGrail, executive managing director, Domestic and International Core Services, DTCC.

"Following a yeaa year of exceptional performance for Deriv/SERV, we are pleased to provide this first time rebate to our dealer customers. Though modest, it reflects our commitment to bringing the benefits of cost efficiency back to our clients. We anticipate making future rebates as our transaction volume and client base continue to increase and we achieve the economies of scale that drive costs down further," said McGrail.

As a member-owned organization, DTCC and its subsidiaries operate on an "at-cost" basis, charging transaction fees for services and then returning excess revenue to its members. Deriv/SERV's dealer customers are charged these "at-cost" fees, which include volume discounts, while buy-side firms are not charged to use the service.

Deriv/SERV: The Global Industry Standard

Recognized by the industry as the global standard for post-trade processing for the OTC credit derivatives market, Deriv/SERV's matching and confirmation service played a key role in helping market participants reduce the backlog of unconfirmed credit derivatives trades by 80% as of June 2006.

Deriv/SERV was expanded in May 2006 to include credit default swap index tranches and expects in the spring to accommodate CDS on loans and CDS on single name asset backed securities. Automated support of lifecycle events for OTC interest rates derivatives went live last October. This spring, the service also expects to expand its comprehensive European and North American equity derivatives coverage to accommodate equity derivatives products such as Asia ex-Japan share and index options and swaps and Japanese index variance swaps. With these additions, Deriv/SERV expects the service will support more than 60 OTC equity, interest rates and credit derivatives products by the first half of this year.

Trade Information Warehouse: A material step forward for the market

Working closely with market participants worldwide, DTCC's launch of the Trade Information Warehouse last November is aimed at addressing industry concerns about the efficiency and certainty of post-trade processing for OTC derivatives contracts throughout their lifecycle, which can extend for years. It is designed to be a comprehensive trade database and support infrastructure that automates and standardizes post-trade processes such as payment calculation and settlement, notional adjustments and contract term changes.

In a March 10, 2006 letter to global regulators, leading credit derivatives dealers cited the development of the warehouse as a "material step forward in reducing operational risk and increasing operational efficiency in the credit derivatives market." Regulators also publicly encouraged robust adoption of the warehouse by industry participants, citing its importance in sustaining a more automated post-trade processing environment.

In December, DTCC announced that it selected CLS Bank International as its partner in providing central settlement of payments for OTC derivatives contracts housed in the warehouse. DTCC also extended its collaborations to include such service providers as Coretexa, Interwoven, Omgeo, SWIFT, Thunderhead, complementing connectivity Deriv/SERV has with such service providers as MarketAxess, Markit, T-Zero and Thomson Trade Web.

Source - http://www.finextra.com/fullpr.asp?id=13805

Publish Date - March 08, 2007

Asset Managers Push Custodians to Offer Independent Pricing Services for OTC Derivatives

Asset managers that enter into over-the-counter (OTC) derivatives contracts and structured products with sell-side trading desks are demanding independent valuation services from their custodians, according to several sources. In response to scrutiny from institutional investors, compliance officers and risk managers, as well as internal boards of directors, investment managers are taking a keen interest in how these complex instruments are priced.

Read complete article at http://www.financetech.com/showArticle.jhtml?articleID=197005764

Published date: Feb 13, 2007

Northern Trust selects Markit for OTC derivatives valuations

Markit Group (Markit), the leading industry source of independent data, portfolio valuations and OTC derivative trade processing for the global financial and commodities markets, today announced that Northern Trust, a leading provider of investment management, fiduciary and banking solutions, has selected Markit as the preferred provider of OTC derivative valuations.

Markit's portfolio valuations service is aimed at mutual funds, hedge funds, traditional asset managers, fund administrators, custodians and banks.The service was launched in response to strong client demand and it addresses growing concerns among investors and regulators over the lack of accurate, independent valuations for complex, illiquid instruments.

This is a bespoke service that provides critical, independent post-trade calculation of the gross asset value of a portfolio of OTC derivative trades. Valuations are provided for both vanilla and exotic instruments, and the service is calibrated with Markit's proprietary data, received from over 75 leading market makers. The ability to refer to these prices, which span over one million data points collected daily, sets Markit apart from alternative services.

Michael Muller, Senior Business Process Analyst at Northern Trust in Chicago, said: "Markit has been valuing our swaps for over a year now. Because of Markit's extensive global support and market coverage across many currencies, we have decided to make them our primary valuations provider for OTC derivatives, and will roll out their valuations across asset classes over the coming months."

Tim Barker, Executive Vice President and Head of Valuations at Markit, added: "We are pleased to have been chosen by Northern Trust to provide independent valuations for OTC derivatives and other complex instruments. As the focus of regulators and investors sharpens on fund valuations, we are seeing increasing demand for our service and we look forward to working with Northern Trust to meet their clients' needs."

Source URL:http://www.finextra.com/fullpr.asp?id=13311

Published date:Feb 06,2007

The Buy Side Jumps on Board the Push to Automate OTC Derivatives

Why It's Important: As traditional asset managers make the transition from cash instruments to derivatives, many conduct the trades over the phone with a dealer and then manually rekey the deals into order management systems because of the lack of automation in the industry for processing derivatives trades. With regulators pressuring the sell side to clean up the backlog of unconfirmed trades, the onus to eliminate inefficiencies and adopt best practices also is shared by the buy side.

Where the Industry Is Now: Buy-side firms are being urged to confirm derivatives trades electronically through DTCC DerivSERV, the industry's electronic confirmation matching service. For traditionally more-standardized credit default swap (CDS) contracts, the market now is processing about 80 percent of the trades electronically via DerivSERV, up from 15 percent in 2004. At least 600 buy-side firms had connected to DerivSERV as of Q4 2006 - the service is being offered free of charge to the buy side. Buy-side firms are relying on their OMSs to tie in analytics and pricing services, or connect into DerivSERV, though they also can use a Web portal.

In addition to trading CDS indices, the two leading fixed-income ECNs, TradeWeb and MarketAxess, both offer different straight-through processing solutions for derivatives processing. TradeWeb's TradeXpress connects to DerivSERV on the back end, and TradeWeb recently integrated prime brokerage trades into the TradeXpress offering.

Focus in 2007: The DTCC launched the Trade Information Warehouse in November 2006 to serve as a central electronic trade repository for all confirmed CDS trades, and the industry will stress the adoption of DTCC's Trade Information Warehouse for credit derivatives. All eligible CDS trades that are confirmed through DerivSERV will be fed into the Warehouse, while dealers are backloading past trades. At the same time, the industry is shifting its focus to the automation of equity derivatives. The next step for equity derivatives is to develop a standardized confirmations template; once that is done, equity derivatives can be included in the Warehouse.

Industry Leaders: Buy-side firms such as Loomis Sayles, PIMCO and Fischer Francis Watts & Trees are major players in credit derivatives. They are expressing their operations perspective through the Asset Manager's Forum (AMF), which is the buy-side operations committee within the Securities Industry Financial Markets Association (SIFMA). SIFMA brings both the buy- and sell-side point of view to the table and has worked with the International Securities Association for Institutional Trade Communication (ISITC) on bringing custodians into the fold, and with the International Swaps and Derivatives Association (ISDA) to create standard documentation.

Technology Providers: Buy-side OMSs - including Charles River, INDATA and Latent Zero - are trying to add functionality for CDSs by connecting to third parties. Alliances are taking place between different OTC derivatives specialists, such as the deal between T-Zero, an agnostic trade messaging and trade affirmation service, and Bloomberg. Markit, a leading source of data valuations for credit derivatives, has teamed with several OMSs and T-Zero. Vendors, such as Thunderhead and Scritura, supply workflow and alerts for processing OTC derivatives.

Price Tag: Aite Group estimates that buy-side institutions in North America and Europe will spend approximately $200 million on technology to automate credit derivatives. Most of the spending is on OMSs and connectivity to the various tools for post-trade processing.

Source URL: http://www.financetech.com/showArticle.jhtml?articleID=197003381

Publish Date: Feb 05, 2007

BoNY expands valuations service for OTC derivatives and asset classes

The Bank of New York, a global leader in securities servicing, has expanded its independent valuation service for a broad spectrum of over-the-counter (OTC) derivative products and asset classes to include European swaptions, foreign exchange options and OTC equity options.

The Bank already provides valuation services for interest rate swaps and credit default swaps.

The Bank's clients have access to daily valuations of their global OTC derivative portfolios as part of the comprehensive account information available to them through INFORM, the Bank's Internet-based information delivery and transaction platform.

"As greater numbers of institutional investors include the use of derivatives in their investment strategies, the demand for independent pricing has never been greater," said Richard P. Stanley, executive vice president and head of Global Investor Services Product Management and Accounting Services at The Bank of New York. "This expansion of our service greatly enhances our ability to report on OTC derivatives valuations, which improves our clients' capacity to monitor and assess their holdings as well as understand and manage their risks."

As one of the world's leading custodians and administrators to fund companies and plan sponsors, Stanley stressed that the Bank's derivatives- related offerings represent a core competency that will grow in sophistication as such clients increasingly utilize derivatives globally.

In addition to independent valuations of derivatives, the Bank recently established a derivatives product team led by Ahmad Sharif, managing director within Global Investor Services, which is focused on creating a comprehensive end-to-end process for servicing derivatives used by hedge funds and institutional investors.

Source: http://www.finextra.com/fullpr.asp?id=13293

Publish Date:05/02/2007

Mellon launches OTC derivative valuation service

Mellon Financial Corporation (Nyse: MEL) has introduced an independent, over-the-counter (OTC) derivative valuation service for a wide range of swaps and options to institutional clients. Mellon will provide these valuations through third party vendors, at the institution's direction.

"A changing regulatory climate, along with increasingly tougher risk and compliance requirements, will motivate institutions to seek independent valuations so they do not rely entirely on their investment managers and prime brokers," said Daniel Wywoda, senior vice president, Mellon's Asset Servicing group. "The market is moving toward suppliers that can provide independent valuations for a wide range of OTC derivatives besides the two most common, interest rate swaps and credit default swaps. We also can obtain valuations for default basket swaps, total return swaps, currency swaps and inflation swaps, among others."

Providing services to support derivatives trading is a strategic area of focus for Mellon. Additional developments planned in this area throughout the next 18 months include enhanced derivatives reporting, transaction processing, and risk and collateral management, Wywoda said.

Source - http://finextra.com/fullpr.asp?id=12840

Podcast: Brad Bailey on Credit Derivatives

Aite Group Senior Analyst Brad Bailey Expects Buy-Side Firms in North America and Europe to Spend About $200 Million on Technology to Handle Credit Derivatives

Regulatory pressure on the credit derivatives dealers is prompting the buy side to automate its own processing. Firms are spending money on OMSs but looking to free tools such as DTCC's DerivSERV for confirmation matching.

Source: Wall Street and Technology
Date: December 25, 2006
URL - http://www.wallstreetandtech.com/blog/archives/2006/12/post_1.html