EuroCCP and Omgeo Test Links in Preparation For Hedge Fund/Prime Broker Service Launch
EuroCCP and Omgeo this month started testing the linkages of their respective systems as they move toward an early 2010 go-live date for their groundbreaking central counterparty (CCP) service for hedge fund trades in Europe.
The firms in June announced joint development of the new service, which will reduce costs and simplify the processing of prime broker/executing broker transactions associated with hedge fund activity while at the same time reducing counterparty risk. By combining a straight-through-processing solution with a CCP to net down numerous settlements into a far smaller number, EuroCCP and Omgeo will help transform post-trade operations for hedge funds, their executing brokers and prime brokers.
“Settlement of hedge fund trades between executing and prime brokers today occurs trade-by-trade and without any CCP guarantee – which entails high settlement costs, operational risks and counterparty risks to all parties,” said Diana Chan, CEO of EuroCCP. “By introducing a CCP in this settlement chain, EuroCCP and Omgeo will dramatically reduce costs and risks and introduce operating efficiencies for the participating firms.”
How it works
The new processing solution will be based on Omgeo’s Central Trade ManagerSM service (CTM), which services trades from execution through to settlement. The service initially will cover equities in 15 European markets and seven currencies. The EuroCCP-Omgeo service will improve in multiple ways how hedge fund transactions are currently processed post-trade. Perhaps most significant, from a hedge fund’s perspective, is that the service will match and lock down trades on trade date, and that trades will be guaranteed by a CCP.
Processing will occur in the following sequence:
- Lock-down of trades in Omgeo CTM upon buy- and sellside matching at both block and allocation level;
- Prime broker’s advice and authorization of the trade for netting and settlement;
- Delivery of status information to all parties to the trade;
- Submitting/routing the trade to EuroCCP for trade guarantee and netting;
- Net settlement at local European central securities depositories (CSDs).
“In today’s market environment, hedge funds are increasingly focusing on operational and counterparty risk,” said Kevin Arthur, director of fixed income, Omgeo. “The efficiencies and risk reduction – by eliminating the need for pre-matching of trades and replacing the executing broker with EuroCCP in the role of counterparty – will free up resources for trading strategies and subsequent execution.”
European solution
While brokers’ experience with Omgeo’s TradeSuite service for U.S. hedge fund transactions helped build demand for a similar product in Europe, the new European processing model was designed by and reflects the needs and priorities of firms’ European teams.
According to EuroCCP and Omgeo, brokers identified the following as top needs for their hedge fund clients: enhanced processing efficiency, trade lock-in on trade date, cost savings, reduced counterparty risk and streamlined trade flow to settlement at CSDs at a netted-down position.
Looking forward, based on strong interest from the institutional community – asset managers and custodians – for a similar processing solution, Omgeo and EuroCCP are establishing an institutional user advisory group to study the new hedge fund model and offer feedback on developing a similar model for their market segment. The new user group aims to start work in London in September 2009.
Delivery timing
Product development is proceeding in two phases, with the linkage of CTM to EuroCCP being tested in the third quarter of this year. EuroCCP and Omgeo will soon distribute to prospective users a Service Description document explaining the processing chain step-by-step.
Prime broker authorization and additional CTM functionality are targeted for delivery late in the first quarter of 2010. Pilot testing will also occur soon after in 2010 and involve two or three hedge funds, two prime brokers and two executing brokers. @