As one of my previous posts explained, the Corrigan Report is due out in a few weeks, and you can bet your bottom dollar that one of its recommendations will for a more robust clearing mechanism in the OTC markets. Regulators the world over (IOSCO included) have been making noises since the credit crunch about tighter controls, the exchanges have been jostling to get OTC business on-platform (most recently Eurex) - and this all seems to tell me that this measure may be largely cosmetic and designed to keep the regulatory wolf from the door.
Another interesting point is the choice of clearer. The Clearing Corporation used to clear all trades for CBOT, but it became independent in 2003 and since then has only cleared (relatively) tiny volumes of derivatives for small exchanges such as the Chicago Climate Futures Exchange. It does not even have a CEO at the moment, and you would have to question its ability to handle the expected volumes - both in terms of staff and systems. However, I suppose we should give them the benefit of the doubt and see what happens in september....
Anyway - here is the Press Release in full;
The Clearing Corporation and The Depository Trust & Clearing Corporation
Announce Credit Default Swap (CDS) Clearing Facility
Linked To DTCC's Trade Information Warehouse
Collaboration to Deliver Central Counterparty Services
and Added Risk Management Benefits
to the OTC Derivatives Market
Chicago and New York, May 29, 2008 – Clearing Corporation (CCorp), and The Depository Trust & Clearing Corporation (DTCC) have signed an agreement that facilitates central counterparty services (CCP) for the over-the-counter (OTC) derivatives marketplace.
Under the agreement, CCorp members will benefit from CCorp's netting and risk management processes and will leverage the asset servicing capabilities of DTCC's Trade Information Warehouse (Warehouse). The Warehouse is the industry's only global repository and centralized post-trade infrastructure for servicing OTC credit derivatives (CDS) contracts throughout their multi-year lifecycles. The agreement with DTCC will allow CCorp members to utilize CCorp as the central counterparty (CCP) guarantor for OTC contracts in credit derivatives while continuing to utilize the Warehouse as the "golden" record for net open positions and for post trade event processing.
The initiative is targeted to launch in 3rd quarter 2008 and will be fully implemented in several product specific phases in 2008-2009.
"Through the use of multilateral netting, margin collateral, and daily marking-to-market of positions, CCorp's clearing facility will improve capital efficiency, increase regulatory transparency, lessen direct counterparty risk and reduce systemic risk relating to the multi-trillion dollar market in credit default swaps" said Michael C. Dawley, Chairman of CCorp.
CCorp's CDS clearing initiative will be open to all qualified clearing participants that satisfy CCorp's requirements relating to credit worthiness and experience in the CDS market. At present, CCorp's clearing participants hold a significant portion of the positions in this marketplace.
At first, the clearing initiative will support CDX North American High Yield and Investment Grade indices. CDS products such as iTraxx indices, index tranches, and single name products are scheduled for subsequent roll outs throughout 2008 and 2009.
"We are pleased that CCorp is utilizing the Trade Information Warehouse and its operational efficiencies to develop a solution that helps market participants reduce their counterparty risk exposure," said Peter Axilrod, Managing Director, Business Development, DTCC. "We believe there is great benefit in the Warehouse's ability to link with CCorp and other complementary service providers because it enables industry members to avoid duplicating costs and to maximize operational and risk management investments."
In the initial phase, joint CCorp and DTCC Warehouse members whose OTC credit derivative trades are stored in the Warehouse can elect to replace their bilateral agreements with a new CCP guaranteed trade backed by the CCorp. Value-added services provided by CCorp in its role as a CCP include multilateral netting of contracts, trade guarantees, collecting forward-looking margin to protect against adverse price moves and performing daily marking-to-market of cleared positions to collateralize losses. The Warehouse then provides further post-trade asset management services including credit default management and centralized net settlement of quarterly payment obligations between counterparties, which is offered in partnership with CLS Bank International.
Today, the Trade Information Warehouse provides the industry with a robust global and centralized post-trade processing platform and automated repository for over 3 million contracts, with more than 10,000 new contracts on average flowing into the Warehouse from Deriv/SERV's matching and confirmation system on a daily basis. Recognized as the industry standard for post-trade processing of OTC derivatives contracts, market participants indicate that more than 95% of credit derivatives trades are matched and confirmed on Deriv/SERV's platform. Deriv/SERV's customer base includes 25 global dealers and more than 1,100 buy-side firms in 31 countries.
