DTCC Connection

Dec 01, 2010 • DTCC Connection

DTCC Launches New OTC Equity Derivatives Cash Flow Matching And Netting Service

by Judy Inosanto


DTCC has launched a new automated, global over-the-counter (OTC) equity derivatives cash flow matching and netting service (CFM), with all of the 14 major dealers (G14) live on the platform.M


"In an environment where risk mitigation is paramount, the OTC derivatives community has placed great priority in promoting improved certainty in the market," said Lawrence Waller, managing director, J.P. Morgan. "The new automated cash flow matching and netting process for OTC equity derivatives facilitates seamless and timely settlement. J.P. Morgan is pleased to be working with the DTCC and our peers to bring such global solutions to market."


The creation and use of the CFM system was part of a commitment the G14 made to global regulators in its March 1, 2010, letter to the Federal Reserve to strengthen the operational infrastructure of the OTC derivatives market. DTCC's Deriv/SERV subsidiary launched the service in collaboration with major market participants after being selected by the industry following an RFP (request for proposal) process managed by the International Swaps and Derivatives Association (ISDA®).


The CFM system is the first of its kind in the OTC equity derivatives space. The initial service supports various equity derivative products, such as vanilla options and swaps traded between the G14 dealers.


Transparency and risk mitigation

"As a member of the OTC derivatives community, Deutsche Bank - together with our industry colleagues - has made a pledge to regulators and customers to enhance the integrity of the OTC derivatives market," said Martin Gould, director of Market Initiatives at Deutsche Bank. "CFM is an important step in furthering regulatory and industry objectives to bring greater transparency and risk mitigation to the global OTC equity derivatives market."


"In launching this new service, DTCC is working to help the industry attain a greater degree of accuracy, certainty and operational efficiency in the processing of OTC equity derivatives payment obligations. We’ve seen the value that our Trade Information Warehouse’s automated netting and settlement functionality has brought to the OTC credit derivatives market and we believe the Equities Cash Flow Matching service can now deliver similar benefits to another OTC derivatives asset class." "– Stewart Macbeth, DTCC managing director and general manager of the Trade Information Warehouse


"DTCC is focused on partnering with users of OTC derivatives markets, service providers, lawmakers and regulators to achieve our collective goal of reducing risk and protecting the soundness of the financial system," said Stewart Macbeth, DTCC managing director and general manager of the Trade Information Warehouse. "In launching this new service, DTCC is working to help the industry attain a greater degree of accuracy, certainty and operational efficiency in the processing of OTC equity derivatives payment obligations. We've seen the value that our Trade Information Warehouse's automated netting and settlement functionality has brought to the OTC credit derivatives market and we believe the Equities Cash Flow Matching service can now deliver similar benefits to another OTC derivatives asset class."


How the service works

Payments must be made between counterparties of an OTC equity derivatives trade either at the time of the transaction, or periodically for equity swap trades, or at the maturity of an option or variance swap.


Market participants can use Deriv/SERV's cash flow matching system to reconcile their payments ahead of the payment date. Upon calculating the amounts due to their counterparty, a market participant can submit cash flow information to the platform either through an MQ computer-to-computer link or via the web. Cash flow information includes payment details (payer, payment amount, payment type, payment date) and selected trade confirmation details.


The CFM system provides many tools for reconciling and resolving payment discrepancies. It also provides participants with automated messaging and online web reporting of the matching status and progress.


"It has never been more important to ensure that market participants have in place operational tools that improve the processing of OTC derivatives transactions across the major asset classes, including equities," said Charles Monnot, co-head of OTC Global Equities & Commodity Derivatives Back-Office, BNP Paribas. "BNP Paribas is dedicated to working with the OTC derivatives community and service providers such as DTCC to bring to market applications that preserve the viability of the marketplace and its infrastructure." @


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