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Operational Efficiency in the OTC Derivative Markets Bank Depository User Group October 17, 2006 Michael Vellecca.

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Presentation on theme: "Operational Efficiency in the OTC Derivative Markets Bank Depository User Group October 17, 2006 Michael Vellecca."— Presentation transcript:

1 Operational Efficiency in the OTC Derivative Markets Bank Depository User Group October 17, 2006 Michael Vellecca

2 2 2 DTCC Confidential OTC Derivatives A Banner Year with No Signs of Slowing Total market reached $236.0 trillion across all asset classes Double digit year on year growth in: Credit Default Swaps up 105%; 2 nd year > 100% Interest Rates up 16% Equity Derivatives up 34% Gross credit exposure estimated to be $9.4 trillion Growth precipitated regulatory attention on operating challenges throughout the year Total market reached $236.0 trillion across all asset classes Double digit year on year growth in: Credit Default Swaps up 105%; 2 nd year > 100% Interest Rates up 16% Equity Derivatives up 34% Gross credit exposure estimated to be $9.4 trillion Growth precipitated regulatory attention on operating challenges throughout the year

3 3 3 DTCC Confidential OTC Derivatives --- CDS Now 3x Equities

4 4 4 DTCC Confidential 2005: CDS Surpassed IRS in Trading Volume

5 5 5 DTCC Confidential 2005: Use of CDS Doubled for Medium Firms

6 6 6 DTCC Confidential Market Growth Reflects Benefits of OTC Market Flexible and cost effective for solving complex financial needs Easily customized to meet specific customer requirements OTC allows ready changes to contract specifications Adaptable to bilateral definitions of risk and exposure Flexible and cost effective for solving complex financial needs Easily customized to meet specific customer requirements OTC allows ready changes to contract specifications Adaptable to bilateral definitions of risk and exposure

7 7 7 DTCC Confidential Continued High Rate of Product Innovation Over 22 CDS templates since 2003 Asset-backed CDS CDS on Loans ?????? Over 22 CDS templates since 2003 Asset-backed CDS CDS on Loans ??????

8 8 8 DTCC Confidential Deriv/SERV Product Coverage -- CDS Transaction Management Working Group prioritizing next templates --- CDS on ABS and CDS on Loans most likely

9 9 9 DTCC Confidential Broader Market Participation --- Across Products signers of ISDA Novation Protocol 600+ Buy Side users of Deriv/SERV Hedge Funds Asset Managers Pension Funds Expansion of prime brokers New Advisory role of Asset Managers Division & MFA in definition of industry solutions Plethora of new solutions providers targeting stages of the value chain signers of ISDA Novation Protocol 600+ Buy Side users of Deriv/SERV Hedge Funds Asset Managers Pension Funds Expansion of prime brokers New Advisory role of Asset Managers Division & MFA in definition of industry solutions Plethora of new solutions providers targeting stages of the value chain

10 10 DTCC Confidential Keys to Managing Growth Industry Standards ISDA documentation Novation Protocols Master Confirms ISDA Matrix Mark-it RED FpML

11 11 DTCC Confidential Keys to Managing Growth -- STP Industry Standards ISDA documentation Novation Protocols Master Confirms ISDA Matrix Mark-it RED FpML E-Trading & Matching TradeWeb MarketAxess Creditex T-Zero SWIFT Accord Swapswire Deriv/SERV BClear

12 12 DTCC Confidential Keys to Managing Growth -- STP Industry Standards ISDA documentation Novation Protocols Master Confirms ISDA Matrix Mark-it RED FpML E-Trading & Matching TradeWeb MarketAccess Creditex T-Zero SWIFT Accord Swapswire Deriv/SERV BClear Post Trade Services Swapclear DTCC Payment Rec TriOptima/eClerx DTCC Warehouse

13 13 DTCC Confidential Industry Agenda 2006 Reductions in backlogs – October regulatory targets for CDS Increased automation – e-trading, trade matching/confirmation (IRS, CDS, Equities) Broad adoption of standardized business processes--- e.g. ISDA Matrix Consideration of cash settlement for CDS Full life cycle servicing with the Trade Warehouse Reductions in backlogs – October regulatory targets for CDS Increased automation – e-trading, trade matching/confirmation (IRS, CDS, Equities) Broad adoption of standardized business processes--- e.g. ISDA Matrix Consideration of cash settlement for CDS Full life cycle servicing with the Trade Warehouse

14 14 DTCC Confidential Status: Trade Confirm and Related Services Credit (all standardized products) Used by all major dealers and over 600 investment and fund managers Market standard (over 20 templates & all life cycle events) Related payment reconciliation service also market standard - over 1.8 million payments per quarterly run, 98% match rate Credit (all standardized products) Used by all major dealers and over 600 investment and fund managers Market standard (over 20 templates & all life cycle events) Related payment reconciliation service also market standard - over 1.8 million payments per quarterly run, 98% match rate

15 15 DTCC Confidential Status: Trade Confirm and Related Services Interest Rates (swaps and swaptions) Large Investment Managers want one solution for their OTC needs Major dealers are implementing to accommodate customer demand. Dealers will need to support different services depending on the client needs Users looking for assistance with best practices (e.g., straddles – 1 deal or 2) Interest Rates (swaps and swaptions) Large Investment Managers want one solution for their OTC needs Major dealers are implementing to accommodate customer demand. Dealers will need to support different services depending on the client needs Users looking for assistance with best practices (e.g., straddles – 1 deal or 2)

16 16 DTCC Confidential Status: Trade Confirm and Related Services Equities (options, variance swaps and equity Swaps) Increased equity derivative volumes (vanilla up 50%, non-vanilla over 100%, year-over-year) ISDA 2006 Benchmarking Survey results (outstanding confirmations for vanilla over 12 days, non-vanilla 21 days, large firms >1500 deals/week, 30+ days outstanding) Lead to an increased focus on automation, similar to what was achieved for credit But challenges exist: Largest issue is the MCA execution and complicity Multiple templates, geographic regions Equities (options, variance swaps and equity Swaps) Increased equity derivative volumes (vanilla up 50%, non-vanilla over 100%, year-over-year) ISDA 2006 Benchmarking Survey results (outstanding confirmations for vanilla over 12 days, non-vanilla 21 days, large firms >1500 deals/week, 30+ days outstanding) Lead to an increased focus on automation, similar to what was achieved for credit But challenges exist: Largest issue is the MCA execution and complicity Multiple templates, geographic regions

17 17 DTCC Confidential Why a Warehouse for Credit Derivatives? Rapid, multi-dimensional growth on a global scale Trading volumes; new products; new market participants; secondary market development Rapid spread of automated trade confirmation Bulk of all trading is now confirmed on an automated basis – both inter-dealer and dealer-to-customer Rapid, multi-dimensional growth on a global scale Trading volumes; new products; new market participants; secondary market development Rapid spread of automated trade confirmation Bulk of all trading is now confirmed on an automated basis – both inter-dealer and dealer-to-customer Trends create both concern around trade administration and opportunity to mitigate the concern

18 18 DTCC Confidential Current Bilateral Administration Environment Parties must constantly sync up during contract life Payments, events, margining, etc. Many manual and duplicative reconciliation/resolution processes (internal and between firms) Each party is hostage to its counterparties processing Youre only as good as your counterparty – your records may be right, but if your counterparty disagrees or doesnt know, you have a problem Operating models vary across firms: different processes for different counterparties Parties must constantly sync up during contract life Payments, events, margining, etc. Many manual and duplicative reconciliation/resolution processes (internal and between firms) Each party is hostage to its counterparties processing Youre only as good as your counterparty – your records may be right, but if your counterparty disagrees or doesnt know, you have a problem Operating models vary across firms: different processes for different counterparties

19 19 DTCC Confidential Central Trade Information Warehouse Solution Two primary components: A comprehensive, centralized trade database with the most up-to-date record of each contract A central processing capability to standardize and automate downstream processing of payments and other post-confirm processes Processing flows automatically from the electronic confirmation environment Two primary components: A comprehensive, centralized trade database with the most up-to-date record of each contract A central processing capability to standardize and automate downstream processing of payments and other post-confirm processes Processing flows automatically from the electronic confirmation environment

20 20 DTCC Confidential Basic Trade Information Warehouse Functions Contract Maintenance Maintain the official legal record of all contracts eligible for automated legal confirmation Must be DTCC eligible, but can come in through other providers Maintain basic economic information for other contracts Event Processing/Messaging Involuntary position adjustments e.g., index notional adjustments due to credit events, etc. Event triggering e.g., credit events, assignment consents, option exercises, etc. Contract Maintenance Maintain the official legal record of all contracts eligible for automated legal confirmation Must be DTCC eligible, but can come in through other providers Maintain basic economic information for other contracts Event Processing/Messaging Involuntary position adjustments e.g., index notional adjustments due to credit events, etc. Event triggering e.g., credit events, assignment consents, option exercises, etc.

21 21 DTCC Confidential Basic Trade Information Warehouse Functions Central Payment Calculation For all offical legal records maintianed in the warehouse (payment matching for contracts with economic records only) Automated feeds to central multi-currency settlement service Central Payment Calculation For all offical legal records maintianed in the warehouse (payment matching for contracts with economic records only) Automated feeds to central multi-currency settlement service

22 22 DTCC Confidential Core Principals Open and attractive to all market participants Global Infrastructure Design should be extendable to other OTC derivative products Open architecture Open and attractive to all market participants Global Infrastructure Design should be extendable to other OTC derivative products Open architecture


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