State Street Strengthens Derivative Servicing Capabilities

Industry Veterans Kevin Sullivan and Neil Wright Join State Street To Focus on Further Developing Derivative Processing Solutions

State Street Corporation (NYSE: STT), the world’s leading provider of financial services to institutional investors, today announced the appointments of Kevin Sullivan and Neil Wright to senior vice presidents with responsibility for overseeing the ongoing development of State Street’s derivative processing capabilities.

Sullivan co-founded Eagle Investments Systems in 1989. The company was acquired by Mellon Financial in 2001, and Sullivan remained to serve as Eagle’s chief technology officer up until 2006. As a product specialist at State Street, Sullivan will be responsible for building the technology infrastructure to support the company’s derivative processing.

Wright joined State Street from Citigroup where he was a director of derivative operations.
Prior to this role, he was senior vice president of asset manager solutions for JPMorgan Chase. As a product expert, he will be responsible for developing strategies to support State Street’s derivative servicing capabilities working closely with the business leaders, derivative specialists and information technology teams.

“These two industry veterans have devoted a considerable portion of their respective careers to developing the most sophisticated derivative processing capabilities,” said Joseph Antonellis, vice chairman, chief information officer and head of State Street’s North American investor services business. “Staying ahead of industry trends and automating the derivative servicing process will be key challenges for service providers. We are delighted to add the extensive experience that Kevin and Neil will bring to our teams and to the development of a derivatives center of excellence.”

Sullivan and Wright will further build on State Street’s derivative servicing capabilities for its customers who are increasingly using derivative instruments as investment tools in their portfolios.

State Street Corporation (NYSE: STT) is the world's leading provider of financial services to institutional investors including investment servicing, investment management and investment research and trading. With $12.3 trillion in assets under custody and $1.8 trillion in assets under management at March 31, 2007, State Street operates in 26 countries and more than 100 geographic markets worldwide. For more information, visit State Street’s web site at www.statestreet.com.

Publish Date: April 19, 2007
Source: Business Wire

Credit Derivatives - At the risky end of finance

The use of credit derivatives has boomed and bemused. These new financial instruments have yet to face their biggest test.

Read the complete article at - http://economist.com/business/displaystory.cfm?story_id=9033348

Publish Date:19-April-2007
Source:The Economist

Isda trumpets progress in credit derivatives while regulators sound alarm

Strong progress has been made in speeding up post-trade processing and cutting the backlog of outstanding confirmations in the fast growing credit and equity derivatives markets, says the International Swaps and Derivatives Association (ISDA).

Post-trade processing of privately negotiated derivatives transactions continues to significantly improve, says Isda, with dealers reducing levels of outstanding confirmations across the asset classes.

Isda's benchmark survey shows the time it takes to process credit derivative trades has fallen to 5.5 days, compared with 16.2 days in 2006, and there has been a reduction to 14 from 50 days for rates products.

Equity levels have fallen to 21 days from around 50, while commodities stand at 7.5 days compared to 23.3 days a year ago.

Among the large firms, over 70% of credit derivatives confirmations are sent out by T+1, up from 50% a year ago.

Commenting on the figures, Robert Pickel, executive director and chief executive officer, Isda, says: "Against a backdrop of robust growth in our business, the industry continues to make real progress in strengthening its operational infrastructure and reducing risk."

But speaking at Isda's annual meeting Jean-Claude Trichet, president of the European Central Bank, called for further market action to improve transparency in global credit derivatives sector and warned that financial markets may have become "excessively complacent".

Reflecting the concerns of regulators worldwide, Trichet warned that credit derivative instruments had not yet been properly "stress-tested", observing that some aggressive investors seemed to display a cavalier risk-­taking attitude even while their balance sheets were not necessarily resilient enough to handle shocks.

Publish Date:19-April-2007
Source:http://finextra.com/fullstory.asp?id=16822

Spending on OTC derivatives IT to hit $1.3bn in 2011 - TowerGroup

Spending on OTC derivatives trading technology by institutional brokers will rise from $915 million in 2007 to $1.3 billion in 2011, a compound annual growth rate of 9.5%, according to the latest TowerGroup forecasts.

But the analyst group says although rapid growth in OTC derivatives is driving technology spending there is currently no "single system" for broker dealers that provides the structure and processing capabilities required.

With the rise in e-trading and automation, TowerGroup says certain "vanilla" OTC derivative products can be handled effectively as they are, but processing of hybrid derivatives is continuing to challenge broker dealers.

In order to improve processing, TowerGroup recommends that firms remove legacy systems that don't support new volumes and products and combine derivatives trading systems with a service-oriented architecture (SOA) to aid in the integration of disparate trading applications. Dealers should also look to harness extra computing power for complex risk measurement through the use of Grid computing.

Firms should also develop a vendor management system, says TowerGroup, and determine which suppliers have developed modules that represent emerging industry standards.

Stephen Bruel, analyst in the securities and capital parkets practice at TowerGroup, says: "Due to the fast moving nature of the OTC derivatives environment, the industry is seeing increased spending on technology as well as increased pressure on technology firms to keep up with derivatives innovation. The successful management of these challenges will enable broker dealers to reap the rewards associated with this high growth, high margin derivatives business."

Last month the Bank for International Settlements called on financial firms to introduce automated systems to cut confirmation backlogs in the over-the-counter derivatives markets.

Publish Date:04-09-2007

Source:http://www.finextra.com/fullstory.asp?id=16765

Algo Takes Credit

A new report predicts algorithmic trading will move into the credit and commodity markets within the next decade, but there is work to be done to ensure success.

The mushrooming market for algorithmic trading will expand into the markets for credit default swaps (CDSes), corporate securities and commodities, according to a new report from Datamonitor, a London-based analyst firm. The report, "Trading System Transformations in Global Markets," predicts that the next generation of algorithmic trading models will penetrate the credit and commodity markets by 2015.

Nii Barnor, an analyst at Datamonitor, says Bank of America, Citi, Goldman Sachs, Lehman Brothers and Morgan Stanley are leading the charge in the evolution of algorithmic trading to meet the demands of traders seeking ever-faster connectivity to new markets. "As the market becomes more standardized, it is expected that algorithms will move into the realm of CDSes and corporate securities. In addition, as commodity exchanges become more electronic, fluctuations in prices will push the demand for mathematical solutions to quickly capitalize on opportunities," the report states.

Datamonitor estimates that global spending on algorithmic trading on derivatives, foreign exchange and commodities will more than double from $31 million in 2006 to $79 million in 2009. However, that figure is still dwarfed by current global spending on algorithmic trading for equities trading, which reached $176 million in 2006.

Read the complete article at http://www.watersonline.com/public/showPage.html?page=435896

Source:http://www.watersonline.com
Publish Date:01-March-2007

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