The tools for transparency
The turmoil in financial markets that precipitated the economic slump has led to calls for more transparency
in the derivatives market. A central repository for gathering data already exists, explains Stewart Macbeth,
managing director of the DTC and general manager of the Trade Information Warehouse.
A new attitude to risk has been born
of the chaos in financial markets
over the past two years, and it has
changed the way everyone – not least market
regulators – looks at leveraged instruments
such as over-the-counter (OTC) derivatives.
At the same time, however, turbulent
markets have provided a valuable test for
the infrastructure through which the trades
themselves are confirmed and settled.
This is a test that The Depository Trust &
Clearing Corporation (DTCC) has passed
with merit. In its role as a credit derivatives
repository (CDR), it has shown it can
provide the transparency and responsiveness
to help the market endure hammer blows
that otherwise could have proved fatal to
the world’s financial infrastructure.
‘You only have to look at the proof points,’
says Stewart Macbeth, managing director
of the DTCC and general manager of
the Trade Information Warehouse. ‘After
Lehman Brothers went down late last year,
we seamlessly managed the processing of
ten major credit events including Lehman,
Freddie Mac and Fannie Mae. That was an
unprecedented burden. If that process were
not automated there would have been a
huge impact around the world. This year,
we’ve processed more than 43 major credit
events, including General Motors – the
largest in US industrial history.’
Through its subsidiaries, the DTCC
provides clearance, settlement and
information services for equities, corporate
and municipal bonds, government and
mortgage-backed securities, money market
instruments and OTC derivatives. It is
also a leading processor of mutual funds
and insurance transactions. Its depository
provides custody and asset servicing for
more than 3.5 million securities issues
from the US and 117 other countries. In
2008, DTCC settled more than US$1.88
quadrillion in securities transactions.
The Trade Information Warehouse,
delivered by Deriv/SERV , was launched in
November 2006 as the market’s first and
only comprehensive trade database and
centralised electronic infrastructure for the
post-trade processing of OTC derivatives
contracts from confirmation to final
settlement. The Warehouse has more than
1,400 key OTC derivatives dealers and buyside
companies in 35 countries as users.
One of its subsidiaries, DTCC also
provides automated matching and
confirmation for OTC derivatives contracts
including credit, equity and interest
rate deals through MarkitSERV , a jointly
owned company with Markit. Key market
participants estimate that more than
95% of the world’s credit derivatives are
electronically confirmed through this service.
A pillar of the market
Macbeth, a recognised OTC derivatives expert
who joined DTCC less than a year ago, knows
its merits from the inside and the outside,
having previously worked at UBS.
‘Our confirmation dataset is very
powerful and we had the idea that an
external database would be useful. That idea
became the Warehouse, which allows us to
handle reconciliation in an automated way.
At UBS, I could see some of the problems,
such as the use of fax-based messages to
determine credit events. That was a problem
for time-sensitive issues, but the Warehouse
now handles these messages,’ he remarks.
‘The industry has grabbed hold of the idea
very quickly. Our confirmation and credit
management services are now central to banks
in the credit derivatives market,’ Macbeth adds.
The DTCC is firmly established in the market
but is coming into its own as banks revise their
approach to risk ,and stability becomes the
priority in global financial markets.
‘The paradigm is around operational risk
but more recently we have seen the issue
of market transparency becoming more
important, especially after Lehman,’ says
Macbeth. ‘So now there is a big role for us to
play in public and regulatory reporting. What
started as an operational tool now plays a role
in managing credit events and giving financial
institutions certainty over their positions.
‘It was seen as an efficiency service but
now it covers many types of risk. In the
future we will look at other derivatives asset
classes, where transparency is much needed,’
he adds. |
