The Depository Trust & Clearing Corporation (DTCC) and CLS Bank
International (CLS) announced today the successful launch of their
central settlement service for over-the-counter (OTC) credit
derivatives transactions. The service, provided through DTCC´s Trade
Information Warehouse, is the OTC derivatives industry´s only
automated solution for calculating, netting and issuing payments
between counterparties to bilateral contracts. The new service greatly
reduces operating risks for users by replacing manually processed
bilateral payments with automated, netted payments.
In the first quarterly central settlement cycle for the new
service on December 20, 2007, the amount of trading obligations
requiring financial settlement was reduced by 98%, from $14.3 billion
gross in aggregate U.S. dollar terms to $288 million net. Gross
settlements by the 14 participating OTC derivatives dealers were
consolidated from 340,000 to 123 net settlements. Payments were made
in five currencies: the US dollar (USD), euro (EUR), Japanese yen
(JPY), British pound (GBP) and Swiss franc (CHF).
"There are few opportunities of this magnitude in the OTC
derivatives market to reduce operational risks while at the same time
increase operating efficiencies," said Diane Schueneman, head of
Global Infrastructure Solutions, Merrill Lynch & Co., Inc. "The
central settlement service developed by DTCC and CLS represents a
tremendous advance for the operations area of this industry."
"Central settlement provides the credit derivatives market with
infrastructure that assures certainty of payment and processing
scalability to address the explosion of credit derivatives transaction
volume and the inherent operational risk of the previous highly manual
processes," said Randolph Cowen, co-Chief Administrative Officer,
Goldman Sachs. "The central settlement process, which leverages DTCC´s
Trade Information Warehouse, has produced full straight-through
processing, allowing us to go all the way from confirmation to payment
calculation to settlement with virtually no manual intervention."
How the central settlement service works
With the new service, bilateral netting and settlement is
completed and reports generated for counterparties early in the
morning on settlement day. The function has been designed to enable
payments associated with transactions confirmed through Deriv/SERV and
residing in the Warehouse´s global contract repository to be netted by
value date, currency and counterparty. Payments eligible for
settlement include initial payments and one-time fees, coupon payments
and payments associated with post-trade events.
The Warehouse generates bilaterally netted payment instructions
and sends them to CLS for settlement. CLS automatically notifies its
Settlement Members, who effect settlement through CLS on a
multilateral, netted basis. Over time, the number of currencies in
which payments can be made will be expanded from the initial five.
"The settlement service breaks new ground in OTC derivatives
operations," said Michael C. Bodson, DTCC executive managing director,
Business Management, Strategy and Marketing for all DTCC businesses.
"Counterparties used to manage payment reconciliations and funds
transfers for thousands of payments on a bilateral basis using manual
processes. Now, once trades are fed into the Trade Information
Warehouse, these steps are handled automatically and, for the first
time, counterparties obtain a full audit trail. The results in terms
of cost savings, risk mitigation and efficiency gains are tremendous."
During the initial launch, which followed an extensive testing
period, the participating dealers settled with each other in defined
clusters. During 2008 additional dealers will go live on the service,
and participants will begin settling among each other outside of their
defined clusters. Also during 2008 the Warehouse´s settlement
capabilities will be expanded in preparation for bringing buy-side
firms on board.
Market transformation through industry collaboration
"By combining CLS´s multi-currency liquidity management capability
with DTCC´s automated processing platform for OTC derivatives, the new
central settlement service demonstrates how industry utilities working
together can provide enhanced value to the market," said Rob Close,
President and CEO, CLS Bank International. "The synergies between our
organizations and the efforts of our Member banks have enabled us to
deliver this important new service in record time and at low cost."
DTCC and CLS initiated their partnership to build the central
settlement solution in December 2006.
CLS Bank International is an integral part of the foreign exchange
market, settling more than 400,000 instructions equivalent to
approximately $4 trillion each day. The bank provides global
settlement services in 15 currencies.
DTCC Deriv/SERV was established in late 2003 to reduce operational
risks and increase operating efficiencies for participants in the OTC
derivatives market by automating the post-trade processing of OTC
financial derivatives transactions. Deriv/SERV is the only post-trade
service provider used by all major global derivatives dealers to
process transactions in the three primary asset classes--credit,
interest rates and equity--which enables market participants to manage
these instruments on a single platform.
With a customer base of more than 1,050 dealers and buy-side firms
in 31 countries, Deriv/SERV has the world´s largest community of users
of automated post-trade processing services for OTC derivatives
transactions. In 2007, Deriv/SERV processed more than 5.8 million OTC
derivatives transactions.
The central settlement function was launched one year after
creation of the Trade Information Warehouse. During that year dealers
completed the backloading into the Warehouse of their inter-dealer
credit derivative contracts and the Warehouse introduced payment
calculation as well as its credit event processing capability, which
industry participants now rely on to verify credit events under
various scenarios. Warehouse backloading and payment calculation,
along with the settlement infrastructure and global reach of CLS, were
essential building blocks to bring the settlement service to market.
About DTCC
DTCC, through its subsidiaries, provides clearance, settlement and
information services for equities, corporate and municipal bonds,
government and mortgage-backed securities, money market instruments
and over-the-counter derivatives. In addition, DTCC is a leading
processor of mutual funds and insurance transactions, linking funds
and carriers with their distribution networks. DTCC´s depository
provides custody and asset servicing for more than 2.5 million
securities issues from the United States and 100 other countries and
territories, valued at $31.2 trillion. In 2006, DTCC settled more than
$1.5 quadrillion in securities transactions. DTCC has operating
facilities in multiple locations in the United States and overseas.
The Trade Information Warehouse is a service offering of DTCC
Deriv/SERV LLC, a wholly-owned subsidiary of DTCC. DTCC Deriv/SERV LLC
provides automated matching and confirmation for OTC derivatives
contracts, including credit, equity and interest rate derivatives.
According to major market participants, over 85% of credit derivatives
traded globally are electronically confirmed through Deriv/SERV. The
Trade Information Warehouse, launched in November 2006, is the
market´s first and only comprehensive trade database and centralized
electronic infrastructure for post-trade processing of OTC derivatives
contracts over their lifecycles, from confirmation through to final
settlement.
For more information on DTCC and DTCC Deriv/SERV, visit
www.dtcc.com.
About CLS Bank International
Continuous Linked Settlement (CLS(R)) eliminates settlement risk
through the world´s first simultaneous and irrevocable global
multi-currency settlement system. The CLS service is offered by CLS
Bank International ("CLS Bank"), and is supported by 70 of the world´s
largest global financial institutions who are shareholders of CLS
Group, the ultimate holding company of CLS Bank.
Over 2,000 institutions are now settling payment instructions
derived from foreign exchange deals through CLS Bank. Of these, 57 are
CLS Bank Members, and an additional 2,042 banks, brokers, funds and
corporates are using the CLS Bank service as Member customers ("third
parties"). Previously institutions had to rely on a global network of
correspondents and a degree of faith that they had received their
payments in one currency as they paid away another - CLS turns this
faith into certainty.
CLS Bank links to the Real Time Gross Settlement systems operated
by Central Banks in fifteen currencies (US Dollar, Euro, UK Sterling,
Japanese Yen, Swiss Franc, Canadian Dollar, Australian Dollar, Swedish
Krona, Danish Krone, Norwegian Krone, the Singapore Dollar, the Hong
Kong Dollar, the New Zealand Dollar, the Korean Won and the South
African Rand). CLS Bank is based in New York and is an Edge
corporation supervised by the Federal Reserve.
For further information, please visit the CLS Website at
www.cls-group.com.
(R) CLS and the CLS logo are registered trademarks of CLS UK
Intermediate Holdings Ltd.
