Fed’s OTC processing targets expanded to interest rates and commodities

As part of the long-term goal of processing OTC derivatives on the date of trade to reduce operational and system risk, the Operations Management Group (OMG) - including 17 major dealers, buy-side firms and three industry bodies – committed to their latest set of targets in a letter to the Federal Reserve Bank of New York on July 31. These covered improving rates for electronic matching and submission of trades and reducing outstanding trade confirmations.

Many of these build upon the previous set of targets outlined in a letter to the New York Fed on March 27. This letter also included commitments to switch to electronic novation platforms rather than via email systems by the end of the year, and incorporating the auction process for cash settlement of credit derivatives into the International Swaps and Derivatives Association's standard documentation.

In addition, the OMG will help the buy side improve operational infrastructure through an implementation plan delivered to the New York Fed on June 9.

“These improvements to the derivatives infrastructure are important to strengthen the resiliency of the financial system,” said Timothy Geithner, the New York Fed’s president.

By the end of October, the OMG has called for processing 65% of electronically confirmable interest rate derivatives on electronic confirmation platforms, with this target rising to 75% by the end of January 2009. By September 30, the group said it will ensure outstanding confirmations aged more than 30 days would not exceed two business days of trading volume (based on average daily volume in April, May and June 2008).

For commodities, dealers and buy-side firms claim they will develop a strategy for increasing counterparty matching rates, while also improving the frequency of trade volume metrics reported to monthly from quarterly.

At the same time, the major dealers have committed to higher targets for credit and equity derivatives.

By the end of the year, the OMG plans to improve credit default swap trade submission to 92% on trade date, 92% matching without modification, and 95% matching by within five days of the trade taking place. The group intends for outstanding confirmations aged more than 30 days to not to exceed one business day of trading volume (based on average daily volume in February, March and April 2008).

For equity derivatives, the goal is for 75% of electronically confirmable trades to be processed through electronic platforms by the end of January 2009. To achieve this, the OMG will encourage market participants that trade 10 or more eligible transactions in a month to onboard to an electronic platform within 90 days. Also by the end of January next year, the group plans to reduce outstanding confirmations aged more than 30 days to less than three business days of trading volume (based on average daily volumes recorded in April, May and June 2008).

The OMG’s implementation plan to help buy-side firms reach the same level of operational efficiency as the major dealers includes educating them on the key issues and making sure they use electronic platforms for trade matching and novations. There are indications many buy-side firms have already made progress with this. In a letter to the New York Fed on June 9 that described the implementation plan, the Securities Industry and Financial Markets Association reported more than 30 of the largest asset managers claim they are already meeting the goals outlined in the March 27 letter for the use of electronic confirmations, submission, matching and accuracy, and sending allocations on trade date.

See also: A creditable target?
Confirmations in the spotlight

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