Matching and netting for OTC equity derivatives

NEW YORK & LONDON--(BUSINESS WIRE)--The Depository Trust & Clearing Corporation (DTCC) announced today that it has launched a new automated, global over-the-counter (OTC) equity derivatives cash flow matching and netting service (CFM), with all of the 14 major dealers (G14) live on the platform.

"In an environment where risk mitigation is paramount, the OTC derivatives community has placed great priority in promoting improved certainty in the market,” said Lawrence Waller, Managing Director, J.P. Morgan. “The new automated cash flow matching and netting process for OTC Equity Derivatives facilitates seamless and timely settlement. J.P. Morgan is pleased to be working with the DTCC and our peers to bring such global solutions to market.”

The creation and use of the CFM system was part of a commitment the G14 made to global regulators in their March 1, 2010 letter to the US Federal Reserve to strengthen the operational infrastructure of the OTC derivatives market. DTCC’s Deriv/SERV subsidiary was selected as the vendor and launched the service in collaboration with major market participants upon being selected by the industry following a RFP (Request for Proposal) process managed by the International Swaps and Derivatives Association (ISDA®) The CFM system is the first of its kind in the OTC equity derivatives space. The initial service supports various equity derivative products, such as vanilla options and swaps traded between the G14 dealers.

“As a member of the OTC derivatives community, Deutsche Bank – together with our industry colleagues - has made a pledge to regulators and customers to enhance the integrity of the OTC derivatives market,” said Martin Gould, director, Market Initiatives, at Deutsche Bank. “CFM is an important step in furthering regulatory and industry objectives to bring greater transparency and risk mitigation to the global OTC equity derivatives market.”

“DTCC is focused on partnering with users of OTC derivatives markets, service providers, law makers and regulators to achieve our collective goal of reducing risk and protecting the soundness of the financial system,” said Stewart Macbeth, managing director, DTCC and general manager of the Trade Information Warehouse. “In launching this new service, DTCC is working to help the industry attain a greater degree of accuracy, certainty and operational efficiency in the processing of OTC equity derivatives payment obligations. We’ve seen the value that our Trade Information Warehouse’s automated netting and settlement functionality has brought to the OTC credit derivatives market and we believe the Equities Cash Flow Matching service can now also deliver similar benefits to another OTC derivatives asset class.”

How the Service Works

Payments must be made between counterparties of an OTC equity derivatives trade either at the time of the transaction, or periodically for equity swap trades, or at the maturity of an option or variance swap. Market participants can use Deriv/SERV’s cash flow matching system to reconcile their payments ahead of the payment date. Upon calculating the amounts due to their counterparty, a market participant can submit cash flow information to the platform either through a MQ computer-to-computer link or via the web. Cash flow information includes payment details (payer, payment amount, payment type, payment date) and selected trade confirmation details. The CFM system provides many tools for reconciling and resolving payment discrepancies. It also provides participants with automated messaging and on-line web reporting of the matching status and progress.

“It has never been more important to ensure that market participants have in place operational tools that improve the processing of OTC derivatives transactions across the major asset classes, including equities. BNP Paribas is dedicated to working with the OTC derivatives community and service providers such as DTCC to bring to market applications that preserve the viability of the marketplace and its infrastructure,” said Charles Monnot, Co-Head of OTC Global Equities & Commodity Derivatives Back-Office, BNP Paribas.

Additional Information on DTCC’s Global Repository Services

DTCC also operates the global reporting repository for the OTC equity derivatives market (EDRR) through its European-based DTCC Derivatives Repository LTD (DTCC Derivatives Repository) subsidiary. The building of the equities repository also follows a competitive RFP process led by ISDA and is intended to bring greater transparency into the trading of these instruments. All of the G14 dealers are live on the service. EDRR generates reports that keep market participants and regulators up-to-date on the industry’s outstanding OTC equity derivatives notional and positions as well as other position related information through a single, secure, easy-to-access portal.

DTCC Derivatives Repository will also house global credit default swap (CDS) data which mirrors that registered in DTCC’s New York-based Warehouse Trust Company LLC (Warehouse Trust). The move is, in part, intended to help ensure that regulators globally have secure and unfettered access to CDS information by establishing identical data sets on two different continents. DTCC Derivatives Repository is a UK Financial Services Authority (FSA) regulated service company.

Warehouse Trust Company LLC is DTCC’s US-based global trade repository and centralized lifecycle event processing, netting and settlement service for the approximately US $26.6 trillion CDS market. Virtually all CDS contracts are registered in the Warehouse, whose customer base includes all global derivatives dealers and more than 1800 buy-side customers in 50 countries.

Helping bring greater transparency to the market, DTCC publishes weekly on its website www.dtcc.com current and historical aggregate data on CDS trades maintained in the Warehouse’s global repository. It also provides global regulators, specific counterparty information based on guidelines provided by the OTC Derivatives Regulators’ Forum.(ODRF) Comprising more than 40 international financial regulators, central banks and banking supervisors the ODRF was formed to provide regulators with a means to cooperate, exchange views and share information related to OTC derivatives CCPs and trade repositories.

DTCC, along with Markit, also provides OTC equity, credit and interest rates matching and confirmation through its jointly-owned company, MarkitSERV.

About DTCC

DTCC, through its subsidiaries, provides clearance, settlement and information services for equities, corporate and municipal bonds, government and mortgage-backed securities, money market instruments and over-the-counter derivatives. In addition, DTCC is a leading processor of mutual funds and insurance transactions, linking funds and carriers with their distribution networks. DTCC's depository provides custody and asset servicing for more than 3.6 million securities issues from the United States and 121 other countries and territories, valued at US$33.9 trillion. In 2009, DTCC settled nearly US$1.48 quadrillion in securities transactions. DTCC has operating facilities and data centers in multiple locations in the United States and overseas.

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