The 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 CCorps netting and risk management processes and will leverage the asset servicing capabilities of DTCCs Trade Information Warehouse (Warehouse). The Warehouse is the industrys only global repository and centralised post-trade infrastructure for servicing OTC credit derivatives (CDS) contracts throughout their multi-year lifecycles. The agreement with DTCC will allow CCorp members to utilise CCorp as the central counterparty (CCP) guarantor for OTC contracts in credit derivatives while continuing to utilise 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, CCorps 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 says Michael C. Dawley, chairman, CCorp.
CCorps CDS clearing initiative will be open to all qualified clearing participants that satisfy CCorps requirements relating to credit worthiness and experience in the CDS market. At present, CCorps 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 utilising the Trade Information Warehouse and its operational efficiencies to develop a solution that helps market participants reduce their counterparty risk exposure, says Peter Axilrod, managing director, Business Development, DTCC. We believe there is great benefit in the Warehouses ability to link with CCorp and other complementary service providers because it enables industry members to avoid duplicating costs and to maximise 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 legal 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 collateralise 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.
The Trade Information Warehouse provides the industry with a robust global and centralised 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/SERVs matching and confirmation system on a daily basis. Recognised 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/SERVs platform. Deriv/SERVs customer base includes 25 global dealers and more than 1,100 buy-side firms in 31 countries.