The Depository Trust & Clearing Corporation (DTCC) has plans to revolutionise the processing of over-the-counter (OTC) derivatives contracts.
DTC intends to create a central industry trade information warehouse and support infrastructure to automate and centralise 'downstream' processing over the life of an OTC derivatives contract.
The solution will consist of a central trade information warehouse for credit derivatives -- essentially a comprehensive database containing the 'golden copy' of each trade -- and a central support infrastructure that standardises and automates 'downstream' processes throughout the life of each contract.
The 'downstream' processing supported in the first release, planned for mid-2006, will include maintaining the 'current state' of each contract (after taking into account full and partial assignments, terminations, etc.), as well as calculating and bilaterally netting the cash flows associated with each contract. With industry support, additional downstream processes may be considered.
DTCC expects decisions around the timing and content of subsequent releases, including possible extensions to other OTC derivatives, to be made over the course of this year.
'We view the maintenance and support of OTC derivatives contracts over their life as the next big issue facing the industry,' says Michael C Bodson, managing director, Global Head of Operations for Morgan Stanley, and chairman of DTCC's OTC Derivatives Operations and Planning Committee. 'This represents a giant leap forward to solve that problem, and is essential to support expected market growth. We expect that the industry will see enormous efficiency gains and operational risk reduction.'
Guido Buehler, managing director, Global Head of Fixed Income and FX Operations, UBS Investment Bank, and member of DTCC's OTC Derivatives Operations and Planning Committee, adds: 'We're starting with credit derivatives for two reasons. First, the growth and success of the market makes it an obvious choice. Second, it's the only place where, through Deriv/SERV, the industry has brought the bulk of the community trading - both dealers and buy side firms - into an automated confirmation environment.
'In addition to all of the leading dealers, over 200 traditional and non-traditional asset managers worldwide already use the service. We will be working in conjunction with the buy-side community on the design and implementation of this next step in order to achieve true STP.'
The proposed establishment of the trade information warehouse is a significant step for asset management firms, according to Joseph Sack, executive vice president and advisor to the Asset Managers Division at the Bond Market Association. 'Asset managers appreciate having a seat at the table concerning this initiative and believe that a longer term solution will enhance efficiency and engender a greater confidence in the industry's processing infrastructure on all sides of this growing market,' he says.
DTCC has been working closely with 11 leading global dealers to develop the overall concept and detailed design to deliver this industry infrastructure solution. The project will be overseen by a Senior Operations Group, which has been established by the OTC Derivatives Operations and Planning Committee of DTCC's Board to make implementation recommendations to the Board Committee. The trade warehouse and support infrastructure is being designed to eventually accommodate other OTC derivatives, including rates, equities, FX and commodities derivatives.
'Our long-term shared vision with the industry is to focus on how to manage post-trade processing in the OTC derivatives market space,' said Robert McGrail, DTCC executive managing director for Domestic and International Core Services. 'Beginning with credit derivatives, our goal is to create at DTCC a global, extendable and open platform to reduce the risk and cost associated with OTC derivatives.''
When fully implemented, the new infrastructure will streamline many processes that occur throughout a risk management perspective, the new infrastructure will help firms ensure accurate balance sheet information, promote correct and complete payments, and manage credit events more smoothly.
'This will be a global infrastructure,' says Peter Axilrod, managing director, DTCC Business Development. 'We're building a solution for customers -- both dealers and buy-side firms -- who are looking for a single trade warehouse and standard processes globally. Our core design principles are inclusiveness -- so that it is open and attractive to all market participants -- and open architecture -- to facilitate integration with other value-added service providers.
'This initiative will require a significant effort not only from DTCC, but also from the market participants themselves. We are fortunate to have the focus of very senior management of leading participants in the OTC derivatives market. This is really how success will be achieved.'
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