The Depository Trust & Clearing Corporation (DTCC) today announced significant strides in reducing risk in the over–the–counter (OTC) credit derivatives market by successfully executing payment netting for the industry. Over the past three quarterly payment cycles, DTCC has reduced 1.62 million gross payments valued at US$72.5 billion (£36.5 billion) gross to 823 net payments valued at US$3.5 billion (£1.8 billion), achieving an average 95% netting factor.
DTCC´s central settlement service, launched in late 2007 and provided in collaboration with CLS Bank International ("CLS Bank"), addresses one of the major concerns outlined by the Federal Reserve Bank of New York as well as U.S. Treasury Secretary Henry M. Paulson, Jr."”the need for further enhancements to the post–trade processing infrastructure for OTC derivatives to reduce operational risks in this market. "To support long–term growth, the processing infrastructure must be capable of processing transactions efficiently through periods of sustained high volume and market volatility," the New York Fed said in a statement issued in March 2008. Among the commitments industry participants have made to enhance this infrastructure, the New York Fed noted, is the implementation of centralized settlement.
"By replacing manually generated bilateral payments with automated, netted payments processed through our Trade Information Warehouse, DTCC has addressed a significant area of risk that concerns our customers and their regulators," said Frank De Maria, DTCC managing director and chief operating officer of DTCC Deriv/SERV LLC. "Our vision has been to simplify and streamline the payment process for bilateral contracts as well as create a global centralized repository for OTC derivatives contracts that automates record–keeping and enhances trading parties´ ability to track their contractual obligations."
The 17 dealers now participating in DTCC´s central settlement service"”up from 14 when the service was launched"”represent the vast majority of the dealer volume in the global OTC derivatives market. The service will be opened to buy–side clients starting in 2009.
In the most recent quarterly settlement cycle, on June 20, the 17 participating dealers had 66 bilateral settlement relationships among themselves. Since that time, the number of bilateral relationships has climbed to 107. By comparison, when the settlement service was launched, the 14 participating dealers had 19 bilateral relationships. The sharp increase in bilateral relationships in less than seven months has contributed substantially to the volume growth on the service and demonstrates the industry´s progress in meeting its commitments regarding centralized settlement.
Quarter–by–Quarter Statistics
Based on the schedule of periodic coupon payments for OTC credit derivatives, payment activity volume for these contracts spikes on the quarterly settlement dates, also known as the quarterly rolls, which occur on March 20, June 20, September 20 and December 20 of each year. Because of the high volumes, DTCC focuses its central settlement reporting on the quarterly roll results as a way to assure market participants that netting is reducing risk. DTCC, working with CLS Bank, also performs payment netting and central settlement for OTC credit derivatives on a daily basis.
Results of the central settlement service´s first three quarterly rolls are summarized below:
- On June 20, 2008, 880,000 gross settlement obligations of 17 participating dealers were consolidated into 500 net settlements. The amount of trading obligations requiring financial settlement in the June cycle was reduced from US$40 billion (£20.1 billion) gross to US$2 billion (£1 billion) net.
- On March 20, 2008, 400,000 gross payments worth approximately US$18 billion (£9.1 billion) were netted down to 200 payments worth about US$1.2 billion (£604 million). Fifteen dealers participated in this cycle.
- On December 20, 2007, 340,000 gross payments worth about US$14.5 billion (£7.3 billion) were netted to 123 payments valued at approximately US$288 million (£145 million). Fourteen dealers participated.
"We have made substantial progress in addressing customer needs and regulators´ concerns about reducing risk in the credit default swap market," De Maria said.
Central Settlement Service: How It Works
The settlement service is provided through Deriv/SERV´s Trade Information Warehouse, which generates bilaterally netted payment instructions and sends them to CLS Bank. CLS Bank automatically notifies its Settlement Members, who effect settlement through CLS Bank on a multilateral, netted basis. Payments through the service are made in five currencies: the US dollar (USD), euro (EUR), Japanese yen (JPY), British pound (GBP) and Swiss franc (CHF).
The service demonstrates how industry utilities working together can provide enhanced value to the market, by combining CLS Bank´s multi–currency liquidity management capability with DTCC Deriv/SERV´s automated processing platform for OTC derivatives.
CLS Bank is an integral part of the foreign exchange market, settling more than 500,000 instructions equivalent to approximately US$4.5 trillion each day. The bank provides global settlement services in 17 currencies.
With a customer base numbering more than 1,100 dealers and buy–side firms in 31 countries, Deriv/SERV has the largest community of users of automated post–trade processing services for OTC credit, interest rate and equity derivatives transactions. The Trade Information Warehouse is the market´s first and only comprehensive trade database and centralized electronic infrastructure for the post–trade processing of OTC derivatives contracts over their lifecycles. Besides central settlement, the Warehouse provides record–keeping, payment calculation, novation consent and automated credit event processing services.
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 3.5 million securities issues from the United States and 110 other countries and territories, valued at US$40 trillion. In 2007, DTCC settled more than US$1.86 quadrillion in securities transactions. DTCC has operating facilities in multiple locations in the United States and overseas.
DTCC Deriv/SERV LLC, a wholly–owned subsidiary of DTCC, provides automated matching and confirmation for OTC derivatives contracts, including credit, equity and interest rate derivatives. According to major market participants, over 90% of credit derivatives traded globally are electronically confirmed through Deriv/SERV. The Trade Information Warehouse, a service offering of Deriv/SERV 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
Continuous Linked Settlement (CLS®) 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 holding company of CLS Bank.
Over 3,000 institutions are now settling payment instructions derived from foreign exchange deals through CLS Bank. Of these, 61 are CLS Bank Members, and the remainder are banks, brokers, funds and corporates that use 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 seventeen currencies (US Dollar, euro, UK Pound 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, the South African Rand, the Israeli Shekel and the Mexican Peso). CLS Bank is based in New York and is an Edge Corporation bank supervised by the Federal Reserve.
For further information, please visit the CLS Website at www.cls–group.com.
® CLS and the CLS logo are registered trademarks of CLS UK Intermediate Holdings Ltd.
