Automated payments system increases OTC transparency

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LONDON – The Depository Trust & Clearing Corporation (DTCC) and CLS Bank International (CLS) have announced the successful launch of the first automated settlement service for cross-currency over-the-counter derivatives payments.

Work on the system, run through the DTCC’s Trade Information Warehouse, was initiated in December 2006. It is designed to reduce operational risk for the OTC derivatives market by fully automating the manual process of calculation, netting and issuing of bilateral payments between counterparties.

The growing OTC market has attracted criticism for lacking the transparency of regulated exchanges, which are subject to more rigorous and automated payment systems such as the recent implementation of the EU Markets in Financial Instruments Directive (Mifid).

Trading volumes of OTC derivatives in particular are predicted to increase even further over the near term. This will increase the industry-wide need for automated delivery, streamlined delivery and accuracy to be able to accommodate the higher volumes and reduce operational risk.

Automation speeds up transactions – saving money and costs through inefficiency – while reducing the margin for error or fraud through inaccuracy or manipulation. The transparency of payments is also improved through a full audit trail.

“The central settlement process, which leverages DTCC’s Trade Information Warehouse, has produced full straight-through processing, allowing us to go all the way from confirmation to payment calculation to settlement with virtually no manual intervention,” says Randolph Cowen, co-chief administrative officer at US bank Goldman Sachs.

Results from the first quarterly central settlement cycle for the new service reveal the number of trading obligations requiring financial settlement was reduced from $14.3 billion to $288 million – a 98% decrease.

The 14 participating OTC derivatives dealers recorded a reduction from 340,000 settlements to 123, with payments made in US dollars, UK sterling, euros, yen and Swiss francs, and more currencies are planned.

“There are few opportunities of this magnitude in the OTC derivatives market to reduce operational risks while at the same time increasing operating efficiencies,” says Diane Schueneman, head of global infrastructure solutions for investment bank Merrill Lynch.