OTC derivatives exposure-management service to launch

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BRUSSELS – Euroclear Bank will launch an exposure-management service for the over-the-counter derivatives market at the end of this year. The DerivManager service aims to reduce valuation and collateral disputes, operational costs and errors in exposure calculations. Martin Gregson at Euroclear says the bank has involved eight leading investment banks in testing. He is confident most of them will sign up.

DerivManager will provide trade matching and daily portfolio reconciliations between counterparties. By using client-provided valuation data of bilateral derivative contracts, standardising and comparing the two sets of data, and reporting discrepancies in the mark-to-market values, counterparties will be better able to avoid valuation disputes. DerivManager will also attempt to reduce collateral requirements to cover exposures by netting total exposures.

Interest rate swaps, and credit and equity derivatives have surged to record highs of €327 trillion but Euroclear claims insufficient levels of post-trade standardisation and automation have created backlogs of unprocessed transactions, severe reconciliation breaks, and problems of exposure and collateral management.

Gregson says exposure management relating to bilateral OTC derivatives trades has placed “considerable strain on clients’ back offices, as a result of time-consuming administrative tasks”. The large sums traded make the potential for serious operational risks in exposure management significant.

Euroclear is attempting to fill the gap in the market, and banks that sign up should benefit from the increased clarity of their exposures. Basel II is also increasing the complexity of exposure management, as firms shift away from cash towards securities to collateralise their derivatives trades. DerivManager’s investment in automation and transparency marks an attempt to address these future challenges.