DTCC developing trade warehouse for credit derivatives

The New York-based clearing and settlement company hopes the first phase of the new technology will be ready by the middle of 2006, and expects it to be extended to other over-the-counter (OTC) derivative products at a later date.

The warehouse will comprise a comprehensive database containing the ‘golden copy’ of each trade – in other words, DTCC hopes it will be relied on as an independent third party that will hold the accepted details of credit default swap contracts. Currently, each dealer has what it believes to be the ‘golden copy’ of any given trade through its proprietary systems.

“It’s a way of ensuring dealers’ and other participants’ books and records are aligned without having to go through, for example, repeated reconciliations or cash flow breaks,” said Bill Hodgson, head of business development for DTCC in London.

The so-called ‘downstream’ processing will involve the maintenance of the current status of each contract – after taking account of actions, such full and partial assignments and terminations – and the calculation and bilateral netting of cash flows in each contract.

The initiative follows increased regulatory concern in the US and Europe last year over the adequacy of credit derivatives confirmation processes. The company hopes the new infrastructure will automate the multiple manual and bilateral processes that currently take place through the contract life cycle. It says the infrastructure will help firms ensure accurate balance sheet information, promote correct and complete payments, and manage credit events more smoothly.

“Our long-term shared vision with the industry is to focus on how to manage post-trade processing in the OTC derivatives market space,” said Robert McGrail, DTCC executive managing director for domestic and international core services. “Beginning with credit derivatives, our goal is to create at DTCC a global, extendable and open platform to reduce the risk and cost associated with OTC derivatives.”

DTCC has been working with all the major dealers to develop the trade warehouse and support infrastructure, which will be overseen by its senior operations group, a unit established by the OTC derivatives operations and planning committee of the company’s board.

With further industry consultation, the company plans to add more downstream processes to the support infrastructure at a later stage, including the possibility of enabling credit event processing, says Hodgson. This would allow market participants to more quickly pinpoint the number of trades affected by a given credit event than is currently possible.

Other OTC derivatives, including rates, equities, foreign exchange and commodities, may be added to the technology at a later stage.

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