Asia Risk awards 2010: Technology development of the year

Asia Risk awards 2010: Technology development of the year


With regulators around the world increasingly pushing for central counterparty (CCP) clearing of over-the-counter derivatives in an effort to reduce systemic risk and increase transparency, exchanges and their clearing houses have been looking for ways to bridge the technology gap between the traditional clearing of exchange-traded derivatives, and that of more customised OTC products.

During the past 12 months, Calypso Technology has emerged as the software vendor of choice in this emerging segment of the financial markets, with its Central Clearing services providing clearing houses and their members with the technology required to clear OTC derivatives, as well as the necessary advice on navigating the OTC business. “Clearing houses are not as familiar with OTC derivatives as they are with exchange-traded products,” says Sean McDermott, general manager, Asia Pacific, at Calypso in Singapore. “From a clearing perspective, there are more variables to consider when clearing OTC products. The traditional software that is used to clear exchange-traded derivatives has trouble with the fundamental concepts of customised OTC products, does not support the OTC trade lifecycle events and is unable to handle the significantly different margining requirements. At Calypso, we realised early on that there was a real opportunity to step in and use our expertise in OTC products to help clearing houses navigate these issues.”

As a result, in 2009, San Francisco-based Calypso, which produces integrated trading, risk and processing platforms to financial institutions and corporate treasuries, launched a CCP clearing software solution, the Calypso Central Clearing solution, which has met the needs of clearing houses looking to set up clearing, settlement and risk facilities. Among the key functions provided by Calypso’s product are connectivity to OTC trade registration platforms, real-time validation and clearing, a configurable margining methodology, a risk management tool for back-testing and capital adequacy testing, collateral monitoring, trade servicing, settlement, member default management and delivering services to clearing members.

Calypso offers clearing members tools to help reconcile activity across multiple CCPs, independently validate initial and variation margins, perform their own client margining and produce client reports and statements. The company services the Asia-Pacific region from offices in Tokyo, Singapore, Sydney, Mumbai and Hong Kong. In November 2009, SGX selected Calypso to support its new CCP clearing service for OTC financial derivatives. The system will provide real-time, intra-day pre-novation risk checks using value at risk  methodology, portfolio novation, margining and lifecycle processing for clearing members for OTC financial derivatives.

“We chose Calypso because of the company’s central clearing expertise and the fact that their capabilities best matched our requirements in terms of margining and processing of OTC derivatives throughout the transaction lifecycle, with comparatively few technological adaptations required on our side,” says Panneer Gounder, programme manager at SGX in Singapore. “Calypso places emphasis on innovation and being able to cater to new trends and developments in the marketplace. Responsive to customer needs, they have proven to be able to quickly adapt to the evolving marketplace.”

In June 2010, the Tokyo Stock Exchange Group (TSE) selected Calypso to provide the platform for its new credit default swap (CDS) and CDS index CCP clearing business. The TSE will use Calypso in a similar fashion to offer margining, clearing and settlement, with connectivity to its members and to platforms such as Reuters, Markit and the Depository Trust & Clearing Corp. “Our selection to implement the Calypso software was predominantly driven by their strong knowledge of the OTC derivatives space. Not only were they able to provide us with the relevant systems to clear CDS and CDS index derivatives, but they have also been able to offer valuable advice and business solutions with regard to the clearing of OTC products,” says Kei Miyazato, head of IT business department at the TSE in Tokyo. “We started implementing the software in July 2010 to clear CDS trades from the second quarter of 2011 as per our mandate, and so far, Calypso’s performance has been very satisfactory.”

Calypso’s technology is also being deployed by the Chicago Mercantile Exchange in the US and Eurex in Europe for their CCPs. While on a global level, the debate on the advantages and disadvantages of moving OTC derivatives to clearing houses is by no means resolved, McDermott says Calypso’s software allows market participants to preserve the individual characteristics and tailoring of OTC structures, while satisfying those looking to reduce global systemic risk and enhance market transparency. “As regulators continue to push for central clearing of OTC derivatives through further legislation and capital requirements, there is a strong incentive for market participants to move towards the use of this type of software. We absolutely expect this trend to continue,” he adds.

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