The Depository Trust & Clearing Corporation (DTCC) marked a milestone this month signing the 100th customer for its Deriv/SERV automated credit default swap (CDS) matching service, solidifying its position as the leading global service provider for post-trade processing of these instruments.
Launched in November 2003, Deriv/SERV already has the largest customer base for its credit default swap matching service of any service provider worldwide. Its 100 customers include the 20 largest global dealers in credit derivatives and over 80 leading buy-side firms including hedge funds and investment managers.
"DTCC, in discussions with leading market participants, identified early on the need to offer a complete range of automated end-to-end post-trade processing solutions for OTC credit default swaps. This includes the affirmation and confirmation of credit default swap trades as well as payment matching and bilateral netting," said Peter Axilrod, managing director, DTCC New Business Development.
"As a market leader in the OTC derivatives market, we are quickly expanding into other sectors, offering a global OTC equity derivatives matching and confirmation service and later this year, interest rates swaps matching and confirmation and portfolio reconciliation," he added.
The rapid growth of over-the-counter (OTC) derivatives has helped forge industry consensus around the need to bring greater efficiency and soundness to this market via straight-through processing (STP) solutions. The International Swaps and Dealers Association (ISDA) issued a 2004 report outlining a strategic plan and calling for industry automation of all OTC derivatives products by 2006.
"Strong customer uptake of Deriv/SERV services clearly demonstrates the industry's commitment to streamline and improve processing practices in this dynamic market," said Janet Wynn, managing director and general manager, DTCC Deriv/SERV.
Wynn noted that DTCC signed its 100th customer just 18 months after launching Deriv/SERV’s CDS matching and confirmation service and has an additional 100 buy-side firms in various stages lined up to join the service. A key driver in advancing STP, in just one year since Deriv/SERV entered the market, electronic processing for credit derivatives increased nearly six fold to 35% in 2004, according to data recently released by ISDA. This is up from about 6% the previous year. With the advent of automated processing for such trade lifecycle events as assignments, Wynn thinks electronic processing could reach as much as 75% of the market in the near future.
Wynn expects DTCC's market entry to have an enduring impact. "By helping broker/dealers and buy-side firms strengthen the existing infrastructure for OTC derivatives, our services will solidly position the market to continue to expand and grow globally with reduced operational risk."
OTC derivatives, which represent a relatively young market, have experienced phenomenal growth in the past few years. According to ISDA, the global OTC derivatives market reached about $197 trillion in notional value as of December 2004. The notional market value for credit derivatives alone grew 213% last year to $8.42 trillion in notional value.
Historically, trades for credit derivatives have been processed manually for the most part, involving labor-intensive, paper-driven, fax and telephone exchanges. As a result, confirmations on a swap could take several weeks to complete. But with volume skyrocketing during the past few years, the need to improve efficiency and reduce risk in the processing of these securities has gained increasing urgency.
"From the outset, we have worked closely with the dealer and buy-side community to address this issue and deliver services that can be adopted in a timely and cost-efficient manner," said Axilrod. He sees the movement towards automation as an inevitable trend for derivatives processing. "As the market continues to evolve, DTCC will work with key industry players to deliver value-added services that foster fully automated, straight-through processing through all stages of the derivatives trade life cycle."