CLS to provide payments finality for DTCC credit derivatives utility

CLS to provide payments finality for DTCC credit derivatives utility

The Depository Trust & Clearing Corporation (DTCC) has struck a deal with FX risk reduction network CLS Bank International (CLS) to provide central settlement of payments for over-the-counter (OTC) derivatives contracts housed in DTCC Deriv/Serv’s Trade Information Warehouse.

The partnership will aim to provide an integrated global payment processing infrastructure for the OTC derivatives market, linking the Trade Information Warehouse with a central settlement facility. The new service will come onstream sometime in 2007.

DTCC launched the Trade Information Warehouse in November in close collaboration with key OTC derivatives market participants. Initially supporting credit derivatives, the utility is designed to be extended to other OTC derivatives products including rates, equities, and commodities.

Robert McGrail, executive managing director, domestic and international core services, DTCC, says the agreement with CLS will deliver "an automated, seamless processing and settlement environment for the handling of OTC derivatives contracts on a global basis.

"After an extensive review and selection process by DTCC and its Board’s OTC derivatives operations and planning committee, CLS became the logical choice because of our shared customer base, and CLS’ reputation for resiliency, reliability and broad experience handling foreign exchange."

CLS and its 57 member banks provide global settlement services in 15 currencies, and is an integral part of the foreign exchange market, settling 270,000 instructions equivalent to approximately $2.9 trillion each day.

Guido Buehler, managing director, UBS Investment Bank, and member of DTCC’s OTC derivatives operations and planning board committee, comments: "CLS will support the settlement of warehouse payment obligations in the 9 trade warehouse currencies currently supported with the option to add more currencies in the future."

While most OTC credit derivative transactions are now matched and confirmed electronically through Deriv/Serv, market participants still bilaterally settle payments in a fragmented and non-standardised manner. The Trade Information Warehouse has been developed to automate and centralise up-to-date information about a derivatives contract, and will link this data with CLS’ electronic settlement process, so that payments will take place automatically.

Through CLS, warehouse customers will gain settlement certainty, say the partners. All payment instructions generated by the warehouse and settled by CLS will be final and irrevocable in immediately available funds. The Deriv/Serv warehouse will receive real-time information on the status of all payment instructions that have been submitted to CLS Bank.

The agreement between the two industry-owned ventures will be welcomed by regulators, which have been pushing for privately-operated risk reduction measures in the booming over-the-counter market. It also provides an opportunity for CLS Bank to extend its remit beyond the pure bank-to-bank FX market into fertile new territory in the securities industry.

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