Transcript Document
DTCC Deriv/SERV
Trade Information Warehouse
DTCC Confidential
Transformation of Credit Derivatives Market
• Rapid, multi-dimensional growth on a global scale
Trading volumes; new products; new market participants;
secondary market development
• Rapid spread of automated trade confirmation
Bulk of all trading is now confirmed on an automated basis
– both inter-dealer and dealer-to-customer
Trends create both concern around post-trade processing and
opportunity to mitigate
DTCC Confidential
Growth in Credit Derivatives Market
(Notional Value Outstanding)
$US Trillions
18
16
14
12
10
8
6
4
2
0
DTCC Confidential
4Q 01 2Q 02 4Q 02 2Q 03 4Q 03 2Q 04 4Q 04 2Q 05 4Q 05
Spread of Automated Confirmation through Deriv/SERV
All major dealers
Global buy-side take-up*
* Includes 2nd tier dealers
globally
use Deriv/SERV
450
400
350
300
250
200
150
100
50
0
DTCC Confidential
2004
Current
Current Bilateral Administration Environment
Parties must constantly “sync up” during contract life
• Payments, events, margining, etc.
• Many manual and duplicative reconciliation/resolution processes
(internal and between firms)
Each party is hostage to its counterparties’ processing
• You’re only as good as your counterparty – your records may be
right, but if your counterparty disagrees or doesn’t know, you have
a problem
• Operating models vary across firms: different processes for
different counterparties
DTCC Confidential
Central Trade Information Warehouse
Two primary components:
• A comprehensive, centralized trade database with
the most up-to-date record of each contract
• A central processing capability to standardize and
automate “downstream” processing of payments
and other post-confirm processes
Processing flows automatically from the electronic
confirmation environment
DTCC Confidential
Model for Warehouse
• Central asset servicing through central securities
depositories or listed derivative clearing houses
But
NO book-entry DVP services and
NO central counterparty (CCP) credit intermediation
Complexities of OTC derivatives demanded a
multitude of unique and innovative servicing
solutions.
DTCC Confidential
Warehouse Schematic – 1st Phase
Market Participants
ECNs, e-Checkout
Services, AffirmXpress
Deriv/SERV
Automated Confirmation
Trade Warehouse
•Contract Maintenance
•Event Processing*
•Payment Calculation
•Bilateral Netting
Automated Funds Transfer
Central Funds
Settlement Agents
* Events include credit events, assignment consents
DTCC Confidential
Back Loading
External Data Sources
(notional factors, etc.)
Warehouse Schematic – Potential Build Out*
*Assuming market participant support
Market Participants
ECNs, e-Checkout
Services, AffirmXpress
Deriv/SERV
Automated Confirmation
Other Automated
Confirm Services
Trade Warehouse
•Contract Maintenance
•Event Processing*
•Payment Calculation
•Margin Calculation
•Bilateral Netting
Automated Funds Transfer
Central Funds
Settlement Agents
Back Loading
External Data Sources
(add pricing, resets, etc)
Automated Collateral Transfer
Central Securities
Depositories
* Events include credit events, assignment consents, corporate actions
DTCC Confidential
Core Principle – Extensible Design
Credit
Derivs
Rates
Derivs
Contract
Maintenance
Release 1
2nd half ’06
Event
Processing
Release 1-2
2nd half ’06
(both)
Release 2-3
2nd half ’06;
1st half ’07
Assets
Functions
Full Payment
Processing
(bilateral net)
Full Margin
Processing
(bilateral net)
DTCC Confidential
Equity
Derivs
FX
Derivs
Commodity
Derivs
Participant Cost Savings
Processes eliminated:
Overhead reduced:
• Verbal or ad hoc trade checkouts
• Reduced nostro fees
• Portfolio substantiation/tie-outs
• Efficient collateral processing
• Bilateral cash flow reconciliation
• Standardized, automated
processing for credit (and other)
events
• Assignment e-mail processes
• Margin disputes, delays
• Investigation of breaks with
respect to the above
DTCC Confidential
• More efficient portfolio
management (tear-ups, position
netting, etc.)
Participant Risk Reduction
Correct balance sheet:
Achieves immediate contract
transparency
Reduces risk in:
• Reporting (corporate, regulatory,
etc.)
Other risk reduction:
• Credit event management
(especially multiple credit event
scenarios)
Ad hoc reconciliation
eliminated
Fully transparent data set
Standard messaging
• Market risk management
• Similar for other events
• Counterparty credit risk
management
• Payments always correct and
complete
• Collateral always correct and
complete
DTCC Confidential
User Oversight
Global Senior Oversight Group
• Established by OTC Derivatives Operations & Planning
Committee of DTCC Board
• Dealers – Senior personnel from the 14 major dealers
All committed to their European and North American regulators to
support this project and undertake other actions regarding reducing
operational risk in the credit derivatives market
Other dealers are eligible to participate if they make the same
commitments
• Buy-Side – Senior personnel from Europe and North America
Where possible, nominated by hedge fund and traditional and asset
manager trade associations
DTCC Confidential