Considerations for trade repositories in OTC derivatives markets - Consultative report (May 2010)

See http://www.bis.org/publ/cpss90.pdf

Source: BIS

New CDS system to help volumes,liquidity in Asia-ISDA

Credit default swaps in Asia will now follow a standardised trading format designed to facilitate centralised clearing, improve transparency and in the long-run raise transaction volumes, a trade body said on Monday.

From Monday on, CDS or insurance-like contracts that protect against defaults and restructuring, will adopt standard coupon sizes and the payment of full first coupons, the International Swaps and Derivatives Association said in a statement.

following similar changes in Europe and North America entities in Japan will now trade CDS with standard coupons of 25 basis points (bps), 100 bps and 500 bps and full first coupons going forward.

In the rest of Asia CDS will adopt standard coupons of 100 bps and 500 bps and full first coupons going forward, said ISDA, which represents participants in the privately negotiated derivatives industry.

The move follows similar changes in Europe and North America earlier this year.

"The purpose of creating standardised contracts is it concentrates liquidity and that should facilitate the move to central clearing," said Keith Noyes, ISDA Regional Director, Asia Pacific.

"Pricing will become more transparent and liquidity may increase as everyone is quoting the same thing," he told Reuters.

Under the current system, single-name CDS contracts trade at a par spread -- the level that makes the contract's value at the outset equal to zero for both the buyer and seller of protection.

The new convention will instead fix a coupon at the outset of a contract.

For example, a CDS now quoted at 150 basis points would be quoted with a coupon of 100 basis points plus an additional upfront payment equal to the 50 basis points.

The fixed coupon and variable price make it easier for the dealer or central counterparty to match trades on the same underlying name, even though they are executed at different times and at different spreads.

"We have not seen any notable impact from the changes themselves but over the longer term this will help liquidity and trade volumes," said Richard Cohen, Head of Credit Trading Asia Pacific for Credit Suisse.

The U.S. market took the lead in adopting the new trading conventions in early April but with only two available coupon options at 100 and 500 basis points.

Europe followed in June with four coupons for new trades and two other coupon options to remake existing trades. The two other coupons are 300 and 750 bps.

"The ISDA changes do make clearing easier as they standardise contracts. They would definitely make exchange-based trading a lot easier as well," Cohen said.

Markit, a data provider and index administrator, said the spread widening on many sovereigns makes the move a timely one as standardisation reduces risk.

"The trading of CDS contracts is a global phenomenon and greater standardisation promotes greater operational efficiency and reduced systemic risk," it said in a note.

Publish Date: December 21, 2009

Source URL: http://in.reuters.com/articlePrint?articleId=INTOE5BK09420091221

ISDA: Derivatives trade matching faces challenges

Frequent trade matching is touted as one initiative that can help reduce risk in the $450 trillion, privately traded derivatives markets, though a number of challenges may complicate its wider practice, according to an industry study released on Monday.

Concerns about derivatives exposures, and whether collateral posted against the trades would be sufficient to cover losses if a dealer failed, added to stresses in the financial system last year and helped spark runs on banks including Lehman Brothers.

Differences in the way that derivatives trading partners record trades, which may include whether or not a trade was entered into or variations in a trade's size, terms or value, can be risky as they can leave parties with exposures that they are unaware of.

Disputes over trades can also hold up the exchange of an estimated $4 trillion in collateral that is used to back derivatives and mitigate losses in the event of a counterparty failure.

Large derivatives dealers in June adopted daily trade matching of exposures with each other, known as portfolio reconciliation, a practice which now accounts for around 60 percent of derivatives volumes, the study, conducted by trade association the International Swaps and Derivatives Association, found.

ISDA plans to publish documents detailing best practices and minimum market standards by the end of the year to encourage more of the market to undertake the procedure.

Variations in technology used to compare trades portfolios, and concerns over the quality of data used in the systems, however, pose challenges for expanding the practice to the other 40 percent of the market, ISDA said.

To ensure greater use of the practice, a solution is needed to overcome differences in technology and reticence among some participants to make results from reconciliation transparent to their counterparty.

By Karen Brettell

Publish Date: 21 December, 2009

Source URL: http://www.reuters.com/article/idUSN2123301220091221

Summary of CDS Clearing Initiatives

The first initiatives to set up a central clearing counterparty for CDS originated in the US

• There were four main initiatives to clear CDS in the US, all of which developed at around the same time in 3Q2008
• The initiatives for a European clearing counterparty followed US efforts given pressure from the European Commission and the ECB for a European-based clearing mechanism that could be locally regulated
• Ten banks committed to start using one or more clearing houses in the Eurozone by the end of July 2009
• The most recent initiatives have been from Asia, with Japan Securities Clearing Corporation (JSCC) and Tokyo Financial Exchange (TFX) working out details on how to clear CDS
• However, it is unlikely that participants would want or use two Japanese clearing institutions for OTC products, as the Japanese CDS market is a small proportion of global volumes. Currently, Japan accounts for 0.6 per cent of global CDS volumes outstanding
• Overall, given recent regulatory focus on counterparty risk across derivatives, exchanges and clearing houses are looking to offer centralized clearing services across more derivative products or expand their existing clearing services to include buyside investors where such services were only available to large dealers
• As of mid-Sep 2009, 15 banks (which include Barclays Capital, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase and Morgan Stanley) have made a pledge to the Fed to clear the majority of credit and interest rate derivatives through central counterparties by the end of the year
• The banks have pledged to clear 95 per cent of all eligible credit default swaps and 80 per cent of all credit default swaps through a central clearing party. They have further pledged to submit 90 per cent of eligible interest rate derivatives, 70 per cent of new trades, and 60 per cent of all existing interest rate derivatives to be cleared centrally

What’s common among the initiatives

• All the US based initiatives are from exchanges – CME, Euronext Liffe, Eurex (part of the Deutsche Borse) and Intercontinental Exchange (ICE)
• The European based initiatives are from clearing providers – Eurex Clearing and LCH.Clearnet – who have been involved in the US effort, Eurex Clearing being the clearing provider for Eurex and LCH.Clearnet being the clearing provider for Euronext Liffe
• In addition, ICE has set up a European clearing provider so that they can provide a transatlantic solution
• The Japanese initiatives are from clearing providers - JSCC is 86.3% owned by the Tokyo Stock Exchange and is the clearing house for all Japanese cash equities and derivatives on the Tokyo Stock Exchange; and TFX is owned by its members and specializes in trading and clearing derivatives
• All the initiatives are focused on applying the central counterparty solution to current CDS contracts rather than creating exchange traded instruments such as futures
• The plan is for trades to be done under standard ISDAs and linked to the current ISDA auction process for settlement
• CDS trades will be agreed bilaterally as they are today, but each leg of the trade will be transacted with the central counterparty
• The central clearing counterparty will then determine a margin amount for each of its counterparties

……

Read complete article at Credit Risk Chronicles

Publish Date: December 21, 2009

Source URL: http://creditriskchronicles.blogspot.com/2009/12/summary-of-cds-clearing-initiatives.html

CME Credit Default Swaps Marketplace (from the CME website)

CME Clearing provides participants with an open-access clearing solution for over-the counter credit default swaps. CME Group's OTC CDS clearing solution builds on the existing over-the-counter (OTC) market, with ISDA-based CDS contracts that are economically equivalent to the current OTC contracts.
The CME Group Cleared OTC CDS solution incorporates the proven benefits of our straight-through-processing clearing model to deliver:

• A time-tested regulatory segregation and portability framework that protects both customer positions and margin in the event that a clearing member defaults
• Clearing of CDS trades at the point of execution, which provides immediate cleared trade confirmation and settlement and leaves no window of credit exposure between bi-lateral parties to a trade they wish to clear
• Backloading of legacy positions into cleared trades, simplified through use of existing market infrastructure
• The ability for market participants to leverage their existing relationships and connectivity with CME clearing members
• More than 100 years of experience in clearing, settlement and risk management

CME Clearing enforces a rigorous risk management regime, featuring a multi-factor algorithm specifically developed for CDS products, which efficiently and accurately captures the risk of CDS portfolios. The CME Clearing risk management regime also offers the flexibility to mark positions to market, to ensure that all positions are continuously and adequately collateralized. Because of this proactive and rigorous risk management process, CME Clearing has never suffered a clearing firm default in more than a century of operation….

Read complete article at Credit Risk Chronicles

Publish Date: 16 December, 2009

Source URL: http://creditriskchronicles.blogspot.com/2009/12/cme-credit-default-swaps-marketplace.html

ICE Trust beats buy side deadline

IntercontinentalExchange(R) (NYSE: ICE), a leading operator of regulated global futures exchanges, clearing houses and over-the-counter (OTC) markets, announced that ICE Trust U.S. (ICE Trust) has today begun clearing credit default swap (CDS) contracts for buy-side market participants after receiving U.S. regulatory approval. The first trades were accepted for clearing on a real-time basis shortly after ICE Trust opened for clearing at 8:00 a.m. E.S.T. Twelve clearing members and ten buy-side firms successfully participated in the pre-launch testing and the related preparations in advance of today's launch.

Said Dirk Pruis, President of ICE Trust: "We are pleased to have expanded the important benefits of clearing to the CDS market more broadly and we appreciate the industry's contribution to this initiative. The collaboration of the buy-side and dealer community played a key role in the successful development and launch of customer clearing. ICE Trust has also worked closely with multiple U.S. regulatory agencies to bring this facility for the reduction of systemic risk, increased transparency and safety to these vital markets."
He added, "Customers will benefit from ICE's tested clearing model, global clearing presence and scale. Our customers value our experience clearing over-the-counter markets, in addition to our industry-leading risk management model, strong independent governance and the world's largest default fund."

Developed in conjunction with global buy-side participants and dealers, the buy-side framework introduces trade-date clearing to the CDS market for the first time, as well as providing for segregation of customer funds and enhanced position and margin portability. The open model permits firms to retain important trading and contractual relationships including accepting transactions from a range of competitive existing execution models. In addition, ICE Link provides the infrastructure for connecting the major dealers, inter-dealer brokers and over 400 buy-side firms and enabling product standardization and post-trade processing.

To date, ICE has cleared over $4.3 trillion in notional value of CDS indexes in North America and Europe and has aggregate open interest of $344 billion. ICE Trust commenced operations in March 2009 and has cleared more than $3.1 trillion notional of North American index (CDX) contracts to date. ICE Clear Europe began clearing European index (iTraxx) contracts in July 2009 and has cleared euro 807 billion in notional. ICE Clear Europe earlier today announced that it has begun clearing selected European single name CDS contracts.

ICE has established risk frameworks for its U.S. and European CDS businesses that are separate from its futures businesses, including separate risk models, guaranty funds and margin accounts, as well as a CDS-focused risk management system and an independent governance structure. Through ICE's CDS clearing services, ICE provides a common infrastructure to global CDS market participants within their respective regulatory jurisdictions, while leveraging the legal framework, operational and risk management processes, treasury systems and trade warehousing systems currently in use by the industry.

Publish Date – 12 December, 2009

Source URL - http://www.finextra.com/news/announcement.aspx?pressreleaseid=31472

Clearance of CDS passes milestone

The trading of credit default swaps passed a key milestone on Monday as dealers started placing trades executed with their clients into ICE Trust, a central clearing house for over-the-counter (OTC) derivatives.

A rival clearing service from the CME Group is expected to start clearing the customer trades of dealers this week, possibly beginning as soon as Tuesday.

Read full article at Financial Times

Publish Date: December 14, 2009

Source URL: http://www.ft.com/cms/s/0/8ae3eeaa-e8d9-11de-a756-00144feab49a.html