EuroCCP and Omgeo Partner to Streamline Prime Broker/Hedge Fund Trade Processing
EuroCCP and Omgeo are jointly developing a pan-European equities central counterparty (CCP) service for hedge fund transactions. The new service will mitigate the counterparty risks and reduce the inefficiencies that today characterize the hedge fund/prime broker/executing broker processing chain.
The new processing solution will be based on Omgeo Central Trade ManagerSM (Omgeo CTM), a trade-matching product that services trades from execution through to settlement. Pilot testing of the new model is slated for this year, with the service set to launch in 2010.
“EuroCCP is pleased to join forces with Omgeo on this important initiative for the hedge fund community,” said Diana Chan, CEO of EuroCCP. “We have a shared goal: to deliver automation and its benefits to as many counterparties as possible. With Omgeo’s strong base of hedge fund clients and EuroCCP’s robust central counterparty infrastructure and risk management expertise, together we can extend our capabilities to prime brokers and executing brokers.”
Current risks and costs
Currently, the settlement of hedge funds’ trades between their executing and prime brokers occurs as over-the-counter (OTC) transactions without any CCP guarantee. All parties, including the underlying hedge funds, are exposed to counterparty risk.
In addition, costly and excessive manual procedures to repair unmatched trades erode the profitability of the prime broker/executing broker business today. Furthermore, the heavy information flows required to reconcile unmatched trades and trade allegations add significant burdens to the middle and back offices. These stresses and uncertainties result in higher-than-acceptable numbers of settlement failures, which raise costs and increase operational risks for all parties, particularly prime brokers.
CCP guarantees to the buyside
The new Omgeo-EuroCCP service introduces a CCP into this settlement chain, substantially reducing counterparty risk between the prime and executing brokers and thereby substantially reducing hedge funds’ exposure to their executing brokers. A CCP also enables more efficient operations by netting down the number of transactions that need to be settled.
The service will also mitigate existing counterparty and operational risks and inefficiencies with an institutional trade- processing model that will route hedge fund/prime broker equity trades – as well as other OTC transactions – from trade matching through central counterparty netting and onward to settlement finality. The model will enable a prime broker to authorize locked-in trades and release them to EuroCCP, where the trades will be guaranteed, netted and routed to the proper European central securities depository (CSD) for settlement on a netted basis.
“EuroCCP has done a fantastic job in offering the lowest settlement costs for its participants,” said Marianne Brown, president and CEO of Omgeo. “By working together to streamline trade processing for hedge funds, prime brokers and executing brokers, Omgeo and EuroCCP hope to reduce settlement costs even more. Together we share the goal of greatly reducing post-trade and settlement risks and look forward to leveraging each other’s expertise to bring meaningful value to the prime broker world.”
How it will work
Several prime brokers in London approached Omgeo last year to seek ways to improve the hedge fund trade-processing chain. The effort gained momentum following the Lehman Brothers bankruptcy, as demand intensified from buyside firms for improved counterparty protections. Prospective users of the new service, through a Brokerage Industry User Group (IUG), have assisted Omgeo and EuroCCP in developing the new processing solution.
Hedge funds will access this CCP solution through Omgeo CTM and through their executing and prime brokers that are EuroCCP participants. This CCP solution will require no additional technology build-outs or investments by Omgeo CTM customers who are EuroCCP participants.
EuroCCP participants will be able to access the new service using their existing links to EuroCCP and their existing reports. Clients that use Omgeo CTM will be able to take full advantage of the CCP solution’s benefits, which include the elimination of settlement pre-matching and a streamlined infrastructure.
The processing solution initially will cover equities in 15 European markets and 7 currencies. By netting customers’ gross obligations, EuroCCP will dramatically reduce the number of settlement transactions. (Due to stamp tax regulations, netting is not likely to occur in the near term in the U.K. and Ireland.) @