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Deriv/SERV's Novation Consent Service Facilitates Contract Assignments
One consequence of the recent turmoil in global credit markets has been an uptick in the volume of assignments, or novations, of over-the-counter (OTC) credit derivative contracts, as parties to many contracts have sought to exit their positions by assigning them to new counterparties.
Novation Consent, a new service launched this year by DTCC Deriv/SERV, is well-timed to handle this rise in assignment activity. The service automates the request, approval and notification procedures among the three trading parties involved in an OTC credit derivative contract assignment, as stipulated by the International Swaps and Derivatives Association (ISDA®) in its Novation ProtocolSM.
Novation Consent, developed collaboratively between Deriv/SERV and market participants, will help major OTC derivatives dealers and other market participants meet the commitment they have made to regulators to have all novation requests for credit contracts submitted via electronic platforms rather than email by the end of 2008.
Deriv/SERV is committed to work with all other service providers in this space to collectively provide market participants with the most effective and efficient solution possible.
Toward streamlining
The OTC derivatives industry several years ago began working to improve the way trading parties assign positions to new counterparties, out of recognition that manual novation procedures elevated operating risks and contributed to bottlenecks in post-trade processing.
ISDA in 2005 introduced the first version of its Novation Protocol to help standardize procedures for novating a contract position to a new party. Until that time, the party seeking to exit a contract, or Transferor, frequently did not notify or obtain the consent of its dealer counterparty, known as the Remaining Party, when it assigned its position to a new counterparty, the Transferee. As a result, dealers often did not learn the identity of their new counterparties in a timely fashion. The Protocol altered industry practice by instituting a notification and approval process, and it typically was carried out by three-way email communication.
However, as the volume of novations has continued to grow, these email procedures have become an impediment to achieving straight-through processing.
“Deriv/SERV worked with the OTC derivatives industry to build an automated tool for the processing of novations fully compliant with ISDA’s Protocol,” said Frank De Maria, DTCC Deriv/SERV, chief operating officer. “We have designed Novation Consent to deliver the features trading parties have been seeking, in terms of speed, efficiency and interoperability across platforms.”
Open access, broad coverage
“A critical feature of Novation Consent is its full interoperability with other platforms,” noted Christopher Henshaw, vice president, DTCC Deriv/SERV. “Buyside firms, which are usually in the Transferor role, rely heavily on third-party service providers to manage back-office functions for their derivatives activities. For them, the open-access capability of our service is quite important.”
Specific instruments covered by the Novation Consent service include all credit products currently supported by the Trade Information Warehouse: single-reference-entity credit default swaps (CDS) – including corporates, sovereigns, loans, asset-backed and mortgage-backed instruments – indices and tranches.
Customers can access the service through a variety of interfaces. High-volume users can connect via direct computer-to-computer real-time messaging, while lower-volume users can do so through a Web-browser interface. Internet connections are secured via a digital certificate issued by DTCC Deriv/SERV and a high-security encryption connection. @
[To learn more, contact Chris Henshaw, DTCC vice president, Deriv/SERV, at chenshaw@dtcc.com or 212.855.1355.]