The Depository Trust & Clearing Corporation (DTCC) says it is to enhance payment processing services in the OTC credit default swaps market.
Next month, DTCC will launch a central payments database and service – including flexible on-line reconciliation, bi-laterally agreed netting, and ultimately, settlement of netted amounts in multiple currencies – for credit default swaps.
Mary Ambrecht, managing director for Citigroup and head of its derivatives operations, describes the new service as “an exciting step forward in the growing automation of OTC derivatives and we support this effort to automate and simplify payments for OTC derivatives.”
The original matching service, launched by DTCC last February, has been growing by over 50% quarter to quarter, with more than 260,000 payments processed in September. DTCC expects the enhancements contained in the new service to further increase the number of users.
“This move by DTCC to further streamline derivative payments processing through a central payments database and centralised netting and settlement represents a significant advance for the industry,” says Mark Beeston, COO, integrated credit trading at Deutsche Bank.
“Given the rapid growth in the credit default swap market, it has been one of our top priorities this year to establish a central payments database that will streamline the cash flow matching process,” adds John Stewart, head of Credit Operations Europe at JPMorgan Chase.
“I think these enhancements to DTCC’s OTC derivatives payment processing service have been something that the whole industry has been looking for,” says Matt Redshaw, senior managing director at Bear Stearns. “When implemented, the payment service will help ensure tighter control and risk reduction in a rapidly growing area. The DTCC system will foster continued growth of this market with appropriate controls and monitors in place.”
Jeff Gooch, managing director at Morgan Stanley, says the new system “represents a major step forward in achieving the goal of making payment processing for credit default swaps a seamless, risk free process. We applaud the effort by DTCC.”
Peter Axilrod, DTCC’s managing director, New Business Development, notes that the payments service has also been attracting the attention of major buy-side firms. “A number of major buy-side firms have been using the current service,” he said, “and we expect the use to rise substantially once the enhanced service is made available.”
The enhanced service can also accommodate payments for all OTC derivatives and is not limited to credit default swaps.
“Although the enhancements will be used by firms initially for credit default swaps, the enhanced service can accommodate all OTC derivatives and provide the same benefits to the broader OTC derivative market that it is providing to the credit default swap market,” says Djerizza Weisz, DTCC product manager for the payment processing service. “We were very careful in designing the service with our dealer user group to make sure that the enhancements would accommodate all OTC derivatives without the necessity of further work on our part.”
DTCC points out that bilateral netting is the adding and subtracting of all the financial obligations between two trading parties that results in a single net payment that is to be made. It differs from multi-lateral netting principally in that it does not need to disturb the credit relationships between the parties. With multi-lateral netting, either a central clearing or processing organization will take on the financial risk of one party failing to pay, thus providing a form of credit intermediation, or else the net will have to be entirely undone if one party fails to pay.