Transcript Document

Operational Efficiency in the
OTC Derivative Markets
Bank Depository User Group
October 17, 2006
Michael Vellecca
OTC Derivatives --- 2005 A Banner Year with No
Signs of Slowing
• Total market reached $236.0 trillion across all asset
classes
• Double digit year on year growth in:
• Credit Default Swaps up 105%; 2nd year > 100%
• Interest Rates up 16%
• Equity Derivatives up 34%
• Gross credit exposure estimated to be $9.4 trillion
• Growth precipitated regulatory attention on
operating challenges throughout the year
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OTC Derivatives --- CDS Now 3x Equities
Amounts
CDS & Equity Derivatives
18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
1H02
Notional Amounts Outstanding
CDS
(in Billions of US $)
EQ
2H02
1H03
2H03
1H04
Years
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2H04
1H05
2H05
2005: CDS Surpassed IRS in Trading Volume
Number of Trades
Average Reported Weekly Deal Volume
(Vanilla - All Respondents)
450
400
350
300
250
200
150
100
50
0
2003
2004
2005
Years
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2006
CDS
IRS
EQ
2005: Use of CDS Doubled for Medium Firms
1,600
1,400
1,200
1,000
800
600
400
200
0
CDS
IRS
EQ
Medium Firms
2003
2004
2005
Years
200
150
100
50
0
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CDS
250
2006
Number of Trades
Number of Trades
Large Firms
2003
2004
2005
Years
2006
IRS
EQ
Market Growth Reflects Benefits of OTC Market
• Flexible and cost effective for solving
complex financial needs
• Easily customized to meet specific customer
requirements
• OTC allows ready changes to contract
specifications
• Adaptable to bilateral definitions of risk and
exposure
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Continued High Rate of Product Innovation
• Over 22 CDS templates since 2003
• Asset-backed CDS
• CDS on Loans
• ??????
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Deriv/SERV Product Coverage -- CDS
• Transaction Management Working Group prioritizing next
templates --- CDS on ABS and CDS on Loans most likely
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Broader Market Participation --- Across
Products
• 2000+ signers of ISDA Novation Protocol
• 600+ Buy Side users of Deriv/SERV
• Hedge Funds
• Asset Managers
• Pension Funds
• Expansion of prime brokers
• New Advisory role of Asset Managers Division &
MFA in definition of industry solutions
• Plethora of new solutions providers targeting stages
of the value chain
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Keys to Managing Growth
Industry
Standards
•ISDA documentation
•Novation Protocols
•Master Confirms
•ISDA Matrix
•Mark-it RED
•FpML
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Keys to Managing Growth -- STP
Industry
Standards
•ISDA documentation
•Novation Protocols
•Master Confirms
•ISDA Matrix
•Mark-it RED
•FpML
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E-Trading &
Matching
• TradeWeb
• MarketAxess
• Creditex
• T-Zero
• SWIFT Accord
• Swapswire
• Deriv/SERV
• BClear
Keys to Managing Growth -- STP
Industry
Standards
•ISDA documentation
•Novation Protocols
•Master Confirms
•ISDA Matrix
•Mark-it RED
•FpML
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E-Trading &
Post Trade
Matching
Services
•TradeWeb
•MarketAccess
•Creditex
•T-Zero
•SWIFT Accord
• Swapswire
• Deriv/SERV
• BClear
• Swapclear
• DTCC Payment
Rec
• TriOptima/eClerx
• DTCC Warehouse
Industry Agenda 2006
• Reductions in backlogs – October regulatory
targets for CDS
• Increased automation – e-trading, trade
matching/confirmation (IRS, CDS, Equities)
• Broad adoption of standardized business
processes --- e.g. ISDA Matrix
• Consideration of cash settlement for CDS
• Full life cycle servicing with the Trade
Warehouse
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Status: Trade Confirm and Related Services
• Credit (all standardized products)
• Used by all major dealers and over 600
investment and fund managers
• Market standard (over 20 templates & all
life cycle events)
• Related payment reconciliation service also
market standard - over 1.8 million payments
per quarterly run, 98% match rate
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Status: Trade Confirm and Related Services
• Interest Rates (swaps and swaptions)
• Large Investment Managers want one
solution for their OTC needs
• Major dealers are implementing to
accommodate customer demand.
Dealers will need to support different
services depending on the client needs
• Users looking for assistance with best
practices (e.g., straddles – 1 deal or 2)
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Status: Trade Confirm and Related Services
• Equities (options, variance swaps and equity
Swaps)
• Increased equity derivative volumes (vanilla up 50%,
non-vanilla over 100%, year-over-year)
• ISDA 2006 Benchmarking Survey results (outstanding
confirmations for vanilla over 12 days, non-vanilla 21
days, large firms >1500 deals/week, 30+ days
outstanding)
• Lead to an increased focus on automation, similar to
what was achieved for credit
• But challenges exist:
• Largest issue is the MCA execution and complicity
• Multiple templates, geographic regions
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Why a Warehouse for Credit Derivatives?
• 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 dealerto-customer
Trends create both concern around trade
administration and opportunity to mitigate the concern
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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
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Central Trade Information Warehouse Solution
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
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Basic Trade Information Warehouse Functions
• Contract Maintenance
• Maintain the “official legal record” of all contracts eligible for
automated legal confirmation
 Must be DTCC eligible, but can come in through other
providers
• Maintain basic economic information for other contracts
• Event Processing/Messaging
• Involuntary position adjustments
 e.g., index notional adjustments due to credit events, etc.
• Event triggering
 e.g., credit events, assignment consents, option exercises,
etc.
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Basic Trade Information Warehouse Functions
• Central Payment Calculation
• For all “offical legal records” maintianed in the
warehouse (payment matching for contracts
with economic records only)
• Automated feeds to central multi-currency
settlement service
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Core Principals
• Open and attractive to all market participants
• Global Infrastructure
• Design should be extendable to other OTC
derivative products
• Open architecture
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