Markit and The Depository Trust & Clearing Corporation (DTCC) today announced the formation of a new company that will combine Markit’s front- and middle-office trade processing services with DTCC Deriv/SERV’s back-office post-trade confirmation and matching services.
The new company will provide a single gateway for confirming over-the-counter (OTC) derivative transactions globally.
The new company will comprise Markit’s recently acquired Markit Wire platform (formerly SwapsWire) as well as its other trade processing services such as Markit Trade Manager, Markit Tie Out and Markit PortRec. DTCC will contribute its Deriv/SERV matching and confirmation engine, and its AffirmXpress, MCA Xpress and Novation Consent services. Additional services that will not become part of the new company include Markit’s data and valuation services and DTCC’s downstream Trade Information Warehouse, centralised settlement and payment netting services.
This initiative should accelerate the adoption of electronic processing solutions across the $454 trillion OTC derivative market where approximately 50% of transactions are still confirmed on paper.
In a statement, Stephen Bruel, an analyst in TowerGroup’s Securities and Capital Markets practice, says that TowerGroup’s initial observations include:
95 This partnership will prove to be a critical turning point in the development of a single, global operating infrastructure for the full range of OTC derivatives.
95 The combination of Markit Wire and Deriv/SERV addresses the inefficiencies associated with the current fragmented confirmations landscape, reduces the likelihood of radical regulatory intervention, and eases the strain on industry middle and back offices.
95 Although broker dealers may be concerned that one organization now has monopoly power in OTC confirmations, TowerGroup anticipates that the governance structure will allow the industry to continue to influence the direction of the partnership.
95 TowerGroup expects the partnership will yield a central data repository that can be the springboard for multiple new products, such as portfolio reconciliation and collateral management services.
“Both DTCC and Markit have been instrumental in the OTC derivative community’s efforts to strengthen the operational infrastructure of this dynamic market,” says Eraj Shirvani, chairman of the International Swaps & Derivatives Association (ISDA) and managing director and co-head of European Credit at Credit Suisse. “This alliance is a groundbreaking combination that reaches across borders and asset classes to provide a service that will help a wide range of market participants achieve greater certainty in their transaction processing.”
The new company will be jointly owned by DTCC and Markit, and will be governed by an 11-member board of directors. Michael Bodson, executive managing director for DTCC’s business management and strategy overseeing all DTCC business lines, will be chairman of the new company. Jeff Gooch, executive vice president of Markit, will be the new company’s chief executive officer.
“Since launching Deriv/SERV’s matching and confirmation service in late 2003, DTCC has been committed to helping the OTC derivatives community automate transaction processing and build a robust infrastructure in this rapidly growing market,” Bodson says. “This important new strategic partnership with Markit reflects our ongoing strategy of aligning with other key service providers as a way to help the industry meet its goals and to better serve our customers.”
“By combining the individual strengths of Markit’s trade processing services and DTCC’s Deriv/SERV, we are taking a major step forward in addressing the calls from global regulators and customers for a fully integrated system for processing OTC derivatives. We believe the time is right for consolidation around a combined framework to address the challenges of rapid growth, operational risk and high costs in the OTC derivative markets,” says Lance Uggla, chief executive officer of Markit.
The new company will also offer automated trade affirmation, trade allocation and novation consent solutions to the market on a cross-product basis. It will initially support both DTCC’s and Markit’s confirmation platforms.
The new company will be headquartered in London, with a second major centre of operations in New York City, and representative offices in Europe and Asia. The combined business will have over 1,100 financial institutions as customers, and annual transaction volumes of over 7 million across the OTC interest rate, credit and equity derivative markets.
The DTCC-Markit agreement will become effective following completion of due diligence, regulatory filings and approval by relevant global regulators, including those in the UK and US The name of the new company will be announced at a later date.