DTCC to expand OTC derivatives processing platform

Source: DTCC

The Depository Trust & Clearing Corporation (DTCC) continues to expand its powerful automated post-trade processing platform for OTC derivatives, with a range of new equity derivatives products early in 2007.

New global products will include: Asia ex-Japan (AEJ) share and index options, AEJ share and index swaps, AEJ share and index variance swaps, and Japanese index variance swaps.

DTCC will now have 21 global OTC equity derivatives products supported by its automated matching and confirmation platform. Prior to the addition of the new products, Deriv/SERV already supported American and European share and index options, swaps, and variance swaps and Japanese share and index options.

Increasing Automation

"With the large number of OTC equity derivatives products that currently exist and continue to emerge across the globe, automating this dynamic and complex market is increasingly important," said Gina Ghent, vice president, DTCC business development. "DTCC is working closely with global dealers and buy-side firms, as well as industry groups to bring to market a comprehensive, robust platform that supports a wide range of OTC equity derivatives products. We are leveraging our experience in automating the OTC credit derivatives market, but we're much farther up the learning curve for equities."

The OTC equity derivatives market continues to grow at a steady pace. As of June 2006, according to the International Swaps and Derivatives Association (ISDA), the market had $6.4 trillion in notional value outstanding, an increase of 32% over the prior year. With the number of market participants and products offerings also expanding rapidly, global dealers and buy-side firms are placing greater attention to improving their operational practices, which still rely predominantly on manual methods.

"These recent enhancements are another step in DTCC's ongoing effort to bring greater depth and diversity to the automated service it provides in this fast-growing market," said Peter Axilrod, managing director, DTCC business development. "Bt. "By continually expanding on the capabilities of Deriv/SERV's electronic platform, we aim to help market participants meet their ccommitment to regulators to strengthen their operational infrastructure, increase efficiency and reduce operational risk."

The Documentation Challenge

According to an October 2006 report, "Trends in the OTC Equity Derivatives Market" by independent research firm Aite Group, a primary obstacle to increased automation lies in the lack of legal documentation or Master Confirmation Agreements (MCAs) that have been signed between firms for their OTC equity derivatives transactions. Because of the multi-faceted nature of the market place, identifying and completing the vast array of documents required between counterparties has become cumbersome and problematic.

In a November 21, 2006, letter to the Federal Reserve Bank of New York, 17 of the leading global OTC derivatives dealers addressed the documentation issue and characterized standardization as "our foremost focus and an important precursor to large-scale automated trade matching." The dealers also commented in the letter that they have developed a prioritization plan to create and publish additional MCAs, and to move towards greater adoption of electronic processing platforms. These market participants also pledged to create an environment where frequently traded products are supported by streamlined documentation.

Earlier this fall, DTCC hosted a series of meetings in both NY and London to provide market participants with a greater understanding of the complexities related to documentation for OTC equity derivatives transactions. "Completing these MCAs is an important first step in getting dealer and buy-side firms to begin processing trades in an automated environment, and DTCC will assist the industry every way possible to help MCA execution" said Ghent.

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