Trade Information Warehouse Processes Rising Volume Of Succession Events
While the DTCC Deriv/SERV Trade Information Warehouse’s global repository and credit event processing services have gained recognition as a critical component of the over-the-counter (OTC) derivatives market’s infrastructure, a lesser-known capability is also gaining momentum: automated succession event processing.
The Warehouse’s lifecycle processing functionality supports succession events, which occur when a corporate activity such as a merger, spin-off or reorganization affects the underlying equity, corporate or sovereign debt obligation as well as the credit default swap (CDS) written on that entity. In 2009, the Warehouse processed 129 such succession events, with another 13 events completed through January 2010.
Reducing uncertainty
“DTCC’s goal since launching the Warehouse has been to provide our customers with a robust processing infrastructure that can service an OTC credit derivatives contract throughout is multi-year lifecycle,” said Marisol Collazo, vice president, Product Management, DTCC Deriv/SERV. “By having a well-established automated succession processing capability accessible to market participants, the Warehouse is helping reduce the uncertainty on the status of a CDS transaction due to these types of events as well as prevent the potential delays in the settlement of payment obligations that may result.”
Then and now
Prior to DTCC adding automated successor events processing to the Warehouse’s functionality, these activities were processed manually. Individual market participants needed to sign up for the protocol for each succession event for which they had exposure and then needed to bilaterally amend their transactions.
However, with the April 2008 publication of the International Swaps and Derivatives Association (ISDA®) “Big Bang Protocol,” which was designed to standardize auction payouts on corporate and sovereign CDS, terms for processing lifecycle events such as succession events were defined, allowing the Warehouse to automate the processing of these events for its customers.
Major succession events handled by the Warehouse include the Countrywide Home Loans and Countrywide Financial Corporation acquisition by Bank of America; the Safeco Corp. acquisition by Liberty Mutual Group; the Wachovia Corporation acquisition by Wells Fargo & Company and the nationalization of Anglo Irish Bank.
How succession processing works
Once a succession event is determined by ISDA’s Determinations Committee, DTCC Deriv/SERV works with Markit and the ISDA Credit Operations Working Group to agree on the details related to processing the event. The Warehouse then creates an event master record, which holds the agreed-upon terms, and distributes an Important Notice to inform clients that the event is scheduled for processing.
The Warehouse automatically adheres relevant transactions to the event protocol on behalf of its customers, unless the customer manually opts out, and waits to reach the scheduled processing date to take action. During this time frame, also known as the adherence period, both trade counterparties and DTCC Deriv/SERV can review and validate their data related to the protocol and their transaction. Upon reaching the processing date, the Warehouse automatically amends the succession event transactions to the terms and name of the new reference entity to which the CDS should be associated.
“One of the benefits of automating the adherence protocol through the Warehouse is that it streamlines and centralizes the processing of these successor events, helping prevent counterparty transactions from becoming unconfirmed and ensuring these contracts remain eligible for other downstream processes such as credit event processing,” said Andrew Byatt, director, Product Management, DTCC Deriv/SERV. “The Warehouse’s lifecycle event processing delivers to market participants an efficient means to adhere seamlessly and auto-matically to the protocols of a specific event and eliminates the time-consuming practice of repeatedly adhering multiple contracts held on a given reference entity to a single lifecycle event.”
Benefits of a single repository
In managing the processing of the 129 successor events completed last year, DTCC also collaborated with Markit to analyze the volume of historic events that had taken place throughout the years as well as new events.
Since then DTCC has worked with the industry to prioritize, schedule and execute processing for new and historic events helping to ensure that records on the universe of CDS reference entities in the marketplace reflect the most current status of the underlying securities on which they are written.
Up-to-date records
“With more successor events being processed through the Warehouse, market participants can be assured that DTCC is maintaining the most up-to-date records on the universe of CDS contracts in the marketplace,” said Collazo. “These efforts not only reflect how DTCC is working with the OTC credit derivatives community to strengthen the market’s infrastructure, but they also demonstrate the benefits of operating a single repository where CDS records can be centrally registered and easily accessed.” @