DTCC Returns $3 Million in Rebates to Derivative Dealer Clients Following a Record Year of Performance

By Judy Inosanto

DTCC Deriv/SERV had a record year of performance supporting the global over-the-counter (OTC) derivatives market in 2006, with transaction volume tripling and DTCC providing a first-time rebate of $3 million to its global derivative dealer customers.

Key accomplishments for DTCC Deriv/SERV include:

• Processing a record 2.6 million in transaction volume in 2006, a nearly three-fold increase from the 945,000 handled in 2005.
• Increasing industry usage of Deriv/SERV's matching and confirmation service for credit derivatives to more than 80% in 2006, up from 15% in 2004. This increase has played a key role in addressing regulators' concerns about improving efficiency and managing risk in the marketplace. 
• Growing Deriv/SERV's global customer base to 753 global derivatives dealers and buy-side firms from 207 the prior year. DTCC has the largest community of users for post-trade processing in the OTC derivatives market. Deriv/SERV customers include all major derivatives dealers and a rapidly growing number of investment managers and hedge funds in 30 countries. 
• Extending Deriv/SERV to include additional OTC credit, interest rate and equity derivative products, thereby giving the industry a fully integrated, single gateway through which market participants can automate processing and reduce risk for a wide range of OTC derivatives products. 
• Launching the Trade Information Warehouse to provide an automated central repository for tracking OTC derivatives contracts over their lifecycle, which can extend for years. This large-scale global initiative was singled out by global regulators (U.K.'s Financial Services Authority, U.S. Securities and Exchange Commission, Federal Reserve Bank of New York) in a September 2006 Financial Times op-ed as important in strengthening the "systems and risk mitigants that exist in the market.

Driving down costs
"DTCC's vision is to help our OTC derivative customers minimize operational risk, lower costs and facilitate growth by delivering a centralized, borderless automated solution to process trades in this dynamic market, said Robert McGrail, DTCC executive managing director, Domestic and International Core Services.

"Following a year of exceptional performance for Deriv/SERV, we are pleased to provide this first-time rebate to our dealer customers. Though modest, it reflects our commitment to bring the benefits of cost efficiency back to our clients. We anticipate making future rebates as our transaction volume and client base continue to increase and we achieve the economies of scale that drive costs down further, said McGrail.

As a member-owned organization, DTCC and its subsidiaries operate on an "at-cost basis, charging transaction fees for services and then returning excess revenue to members. Deriv/SERV's dealer customers are charged these "at-cost fees, which include volume discounts, while buy-side firms are not charged to use the service.

Global industry standard
Recognized by the industry as the global standard for post-trade processing for the OTC credit derivatives market, Deriv/SERV's matching and confirmation service played a key role in helping market participants reduce the backlog of unconfirmed credit derivatives trades by 80% as of June 2006.

Deriv/SERV expanded in May 2006 to include credit default swap (CDS) index tranches and expects in the spring to accommodate CDS on loans and CDS on single-name asset-backed securities. Automated support of lifecycle events for OTC interest rates derivatives went live last October.

This spring, the service also expects to expand its comprehensive European and North American equity derivatives coverage to accommodate equity derivatives products such as Asia ex-Japan share and index options and swaps and Japanese index variance swaps. With these additions, Deriv/SERV expects the service will support more than 60 OTC equity, interest rates and credit derivatives products by the first half of this year.

Warehouse: ‘material step forward'
Working closely with market participants worldwide, DTCC's launch of the Trade Information Warehouse last November is aimed at addressing industry concerns about the efficiency and certainty of post-trade processing for OTC derivatives contracts throughout their lifecycle, which can extend for years. It is designed to be a comprehensive trade database and support infrastructure that automates and standardizes post-trade processes such as payment calculation and settlement, notional adjustments and contract term changes.

In a March 10, 2006, letter to global regulators, leading credit derivatives dealers cited the development of the Warehouse as a "material step forward in reducing operational risk and increasing operational efficiency in the credit derivatives market. Regulators also publicly encouraged robust adoption of the Warehouse by industry participants, citing its importance in sustaining a more automated post-trade processing environment.

In December, DTCC announced that it selected CLS Bank International as its partner in providing central settlement of payments for OTC derivatives contracts housed in the Warehouse. DTCC also extended its collaborations to include such service providers as Coretexa, Interwoven, Omgeo, SWIFT and Thunderhead, complementing connectivity Deriv/SERV has with such service providers as MarketAxess, Markit, T-Zero and Thomson TradeWeb. @