Just as USD3.1 billion of credit-default swaps (CDS) tied to General Motors bankruptcy begin to be settled, custodian Brown Brothers Harriman (BBH) has gone live with a central settlement of credit default swap payments for clients.
Central settlement is designed to reduce settlement risk for asset managers by replacing manually processed bilateral payments with automated netted cash flows per account, per currency.
Financial regulators in the US and Europe have actively encouraged the financial services industry to increase the level of automation for the processing of credit derivatives in order to reduce systemic risk, specifically targeting manual payment processing, reconciliation and counterparty risk management.
The Depository Trust & Clearing Corporation (DTCC) and CLS Bank International launched a central settlement service for OTC credit derivative transactions. The service went live with major dealers in November 2007 and several buy-side institutions had targeted implementation by the end of May 2009.
BBH is excited to support this initiative to help our clients better manage their counterparty risk, said Cherie Graham, Senior Vice President and Head of BBHs Derivative Product Group. She adds, BBH has been actively partnering with many of the most sophisticated asset managers to solve operational challenges associated with increased investment in complex OTC derivatives.