DTCC and The Clearing Corporation Announce Credit Default Swap Clearing Facility
DTCC and The Clearing Corporation (CCorp) signed on May 29 an agreement that facilitates central counterparty services (CCP) for the over-the-counter (OTC) derivatives marketplace.
Under the agreement, CCorp members will benefit from CCorp’s netting and risk management processes and will leverage the asset servicing capabilities of DTCC’s Trade Information Warehouse. The Warehouse is the industry’s only global repository and centralized post-trade infrastructure for servicing OTC credit derivatives contracts throughout their multi-year lifecycles.
The agreement will allow CCorp members to utilize CCorp as the CCP guarantor for OTC contracts in credit derivatives while continuing to utilize the Warehouse as the “golden” record for net open positions and for post-trade event processing.
The initiative is targeted to launch in the third quarter of 2008 and will be fully implemented in several product-specific phases in 2008 and 2009.
Benefits of the initiative
“Through the use of multilateral netting, margin collateral and daily marking-to-market of positions, CCorp’s clearing facility will improve capital efficiency, increase regulatory transparency, lessen direct counterparty risk and reduce systemic risk relating to the multi-trillion dollar market in credit default swaps,” said Michael Dawley, chairman of CCorp.
CCorp’s credit default swap (CDS) clearing initiative will be open to all qualified clearing participants that satisfy CCorp’s requirements relating to creditworthiness and experience in the CDS market. At present, CCorp’s clearing participants hold a significant portion of the positions in this marketplace.
At first, the clearing initiative will support CDX North American high-yield and investment-grade indices. CDS products such as iTraxx indices, index tranches and single-name products are scheduled for subsequent rollouts throughout 2008 and 2009.
“We are pleased that CCorp is utilizing the Trade Information Warehouse and its operational efficiencies to develop a solution that helps market participants reduce their counterparty risk exposure,” said Peter Axilrod, DTCC managing director, Business Development. “We believe there is great benefit in the Warehouse’s ability to link with CCorp and other complementary service providers because it enables industry members to avoid dupli-cating costs and to maximize operational and risk management investments.”
How it will work
In the initial phase, joint CCorp and DTCC Warehouse members whose OTC credit derivative trades are stored in the Warehouse can elect to replace their bilateral agreements with a new CCP guaranteed trade backed by the CCorp.
Value-added services provided by CCorp in its role as a CCP include multilateral netting of contracts, trade guarantees, collecting forward-looking margin to protect against adverse price moves and performing daily marking-to-market of cleared positions to collateralize losses. The Warehouse then provides further post-trade asset management services including credit default management and centralized net settlement of quarterly payment obligations between counterparties, which is offered in partnership with CLS Bank International.
More on the Warehouse
Today, the Trade Information Warehouse provides the industry with a robust global and centralized post-trade processing platform and automated repository for over 3 million contracts, with more than 10,000 new contracts on average flowing into the Warehouse from Deriv/SERV’s matching and confirmation system on a daily basis. Recognized as the industry standard for post-trade processing of OTC derivatives contracts, market participants indicate that more than 95% of credit derivatives trades are matched and confirmed on Deriv/SERV’s platform.
Deriv/SERV’s customer base includes 25 global dealers and more than 1,100 buy-side firms in 31 countries. @