DTCC launches OTC Derivatives Trade Information Warehouse

The Depository Trust & Clearing Corporation (DTCC) has launched a Trade Information Warehouse, which it claims will reduce the manual component in post-trade processing of over-the-counter (OTC) derivatives transactions. DTCC announced its plans to build the warehouse in February this year. Since then, a DTCC team ba

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The Depository Trust & Clearing Corporation (DTCC) has launched a Trade Information Warehouse, which it claims will reduce the manual component in post-trade processing of over-the-counter (OTC) derivatives transactions.

DTCC announced its plans to build the warehouse in February this year. Since then, a DTCC team based in London has worked with 19 leading dealing and buy-side firms – including traditional asset managers as well as hedge funds – to develop it. The project was supervised by a Senior Oversight Group, established by the OTC Derivatives Operations and Planning Committee of DTCC’s Board to make recommendations to the Board Committee.

Major credit derivatives dealers have pledged their commitment to the warehouse project. In a letter to the Federal Reserve Bank of New York on 10 March this year they called it “a material step forward in reducing operational risk and increasing operational efficiency in the credit derivatives market.” Financial regulators have also publicly stressed the importance of a global infrastructure for the credit derivatives market and the Trade Information Warehouse.

Testing of the warehouse’s functionality began in September. Back-loading the task of populating the warehouse database with trade data on existing contracts started at the same time, and will continue throughout 2007.

The warehouse consists of two components. First, a comprehensive trade database containing the “official legal record” for all contracts eligible for automated Deriv/SERV confirmation. Secondly, a central support infrastructure that aims to automate and standardise post-trade processes (such as payments, notional adjustments and contract term changes) over the life of each contract. OTC derivatives contracts can extend five or more years.

Initially, the warehouse will support credit derivatives, and then extend to other OTC derivatives products including rates, equities, FX and commodities depending on market demand and input from the senior group working with DTCC in guiding the initiative.

“The trade warehouse is a ‘just in time’ technological solution necessary to support our vibrant OTC derivatives markets,” said Robert E. Diamond Jr., President of Barclays PLC. “My thanks to DTCC and all industry participants who worked tirelessly to implement the warehouse in record time.”

DTCC says OTC derivatives markets require continuous bi-lateral reconciliation for each contract. In other words, each trading party must continually “sync up” with each of its counterparties over the life of each contract, keeping track of post-trade events, such as assignments, amendments, terminations and notional adjustments. Processing is not standard across the industry, and the work involves considerable manual processing, and reliance on faxes, emails and phone calls. Yet the markets are growing fast. The credit derivatives market more than doubled annually through mid-2006, when the notional amount of credit derivatives reached $26.0 trillion up from $12.4 trillion in mid-2005. “The warehouse represents the launch of a very innovative and important industry solution to improve process, efficiency and risk control in the global credit derivatives markets,” says Dick Weil, Chief Operating Officer of PIMCO. “It was made possible by some exceptional cooperation between dealers, investment managers and regulators.”

The warehouse will automate many processes that occur throughout a contract’s life cycle, which today involve significant manual effort, says DTCC. This includes bilateral contract and cash flow reconciliation. Other post-confirmation processes, such as credit event processing and assignment processing, will be made much more efficient. From a risk management perspective, says DTCC, the warehouse will help firms ensure accurate balance sheet information for corporate and regulatory reporting purposes, support accurate collateral management, and promote correct and complete payments.

“The implementation of the warehouse marks a milestone in the evolution of the OTC derivatives marketplace,” says Thomas A. Russo, Vice Chairman, Lehman Brothers. “Our industry has come together in record time to put in place a common operational platform to manage credit derivative contracts over their life yielding standardization, efficiency and risk reduction.”

DTCC claims that 80% of credit derivatives traded globally are now electronically confirmed through is Deriv/SERV service, up from 15% in 2004. The new warehouse will build on Deriv/SERV by using confirmed trade details as input for the warehouse, so that post-trade processing flows automatically from up-to-dated trade terms.

“The trade warehouse is the successful result of a truly co-operative, global effort on the part of both financial services firms and their regulators,” says Hugo Banziger, Chief Risk Officer, Deutsche Bank. “The warehouse demonstrates their common interest to work together to bring about growth and stability to our financial markets.”

All new trades and post-trade events submitted to Deriv/SERV for electronic confirmation will now automatically be loaded into the Trade Information Warehouse. The warehouse will assign a unique reference identifier for each contract, and maintain the “current state” contract terms, taking into account assignments, terminations and amendments.

“Our goal is to provide a safe, efficient processing environment globally modelled on the automated central asset servicing that central securities depositories provide for equities, fixed income and other securities,” says Peter Axilrod, managing director, DTCC Business Development. “The Trade Information Warehouse provides the underpinnings to support the entire post-trade life cycle for OTC derivatives in a paperless environment.”

In 2007, the warehouse will expand to support central payment calculation, and a central settlement capability through links with a central settlement provider to streamline payment settlement. Also in 2007, the warehouse will offer customers the flexibility of electronically reconciling (“tying out”) complex or non-standard contracts that cannot be legally confirmed through Deriv/SERV, replacing the customary telephone-based approach.

The warehouse is designed with a flexible, but secure, open architecture capable of being extended, and allowing other service providers to connect to the warehouse, says DTCC. As a result, claims DTCC, the warehouse will be able to offer additional efficiencies in portfolio management, bilateral margining and other post-trade processes, both directly and through links with other providers.

“We developed the warehouse in close collaboration with leading dealers and buy-side firms over an aggressive ten-month timeframe,” says Bill Hodgson, vice president, DTCC Business Development, who led the development from London. “This has been a cross-border collaboration from developing business requirements, to designing an operating model, to setting processing standards, to testing. We anticipate that a wide range of industry service providers will be connecting to the warehouse and offering complementary services.”