Goldman Sachs has launched a centralized derivatives clearing service for interest rate, credit, foreign exchange, equities and commodities derivatives.
The announcement comes one week after U.S. President Obama signed legislation that will force more derivatives through central clearing houses.
Goldman Sachs Derivatives Clearing Service (DCS) will be run by Jack McCabe and Micheal Dawley, co-heads of futures at the Wall Street bank. The move will centralize all derivatives clearing within the bank. Historically, Goldman Sachs has kept listed derivatives clearing and OTC derivatives clearing as separate business entities.
According to a Goldman Sachs spokesperson: This is a new business area created by client demand for services that helps them navigate the evolving market structure of OTC clearing. While futures have always been regulated, other derivatives were traded on a bilateral basis. With DCS, we will now provide our clients with an integrated derivatives clearing solution. We recognized that clients will be faced with new reporting, connectivity and regulatory requirements with the move to central clearing for OTC derivatives. Our clients want a streamlined clearing experience across asset classes and regions.
Other firms look set to follow Goldman Sachs model. Morgan Stanley launched its Client Clearing business in the first quarter of 2010. A spokesperson also confirmed that Morgan Stanley is partnering with clients and clearing houses in the development of a clearing structure of OTC derivatives, offering an integrated client clearing platform for OTC derivatives and cash products across all product classes.
It seems only a matter of time before major broker/dealers announce the launch of similar products.
“The move to central clearing for OTC derivatives is a significant turning point in the marketplace,” says McCabe. “Our strong trading franchise, coupled with our market-leading futures and prime brokerage services, enables us to provide our clients with the foundation they need to adapt to these important industry developments.”
In regards to the number of clients active on the new service, the Goldman Sachs spokesperson says: We will become clearing members at all viable and in-demand clearing houses. Similar to today, we conduct business out of several entities and will continue to use the appropriate entity to fit the jurisdiction and product. There is very little actively clearing but we are working with quite a few clients.
According to Tony Freeman, executive director, Omgeo: They will be looking for a wide client franchise. This is the sort of thing that they will be offering to hedge funds, institutional fund managers, in the same way they offer their prime finance services. The whole buy-side is a potential market.
Despite pressure from both U.S. and E.U. government to force more OTC derivatives through clearing houses and onto exchanges, the market has been busy creating alternative trading solutions. The Eris Exchange, backed by some of the largest trading firms in Chicago, will clear hybrid contracts similar to current OTC derivatives.
The backers, including Getco LLC, DRW Holdings, Infinium Capital Management and the CME Group, will offer interest rate swaps as futures, instead of the current OTC format. As these new products are structured as futures, they will avoid the imminent financial regulation on OTC derivatives.
Despite market innovation the OTC market is set for radical change. “The OTC market will not go away it will diverge into two segments: exchange traded/CCP cleared products and a smaller more traditional OTC segment, concluded Freeman.