CCP's

[gfaroukh]

Central Counterparties for Over-the-Counter Derivatives

Stephen G. Cecchetti
Bank for International Settlements (BIS) - Monetary and Economic Department; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Jacob Gyntelberg
Bank for International Settlements (BIS)

Marc Hollanders
Bank for International Settlements (BIS)



BIS Quarterly Review, September 2009

Abstract:
Wider use of central counterparties (CCPs) for over-the-counter derivatives has the potential to improve market resilience by lowering counterparty risk and increasing transparency. However, CCPs alone are not sufficient to ensure the resilience and efficiency of derivatives markets.

papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1472960_code456443.pdf?abstractid=1472960&mirid=3

[ccc]

also see:
www.bis.org/publ/cpss64.pdf?noframes=1

[niseag]

DTCC chimes right in:


New York, January 12, 2009 – In an effort to bring greater certainty and safety to the market for credit derivatives, The Depository Trust & Clearing Corporation ("DTCC") today announced it will support all central counterparty ("CCP") solutions for credit default swaps, in a non-discriminatory manner, with its Trade Information Warehouse, whose capabilities include central net settlement and asset servicing.

Through its DTCC Deriv/SERV subsidiary ("Deriv/SERV"), the company is currently working with ICE Trust/The Clearing Corporation, CME/Citadel, LIFFE/LCH, and Eurex to facilitate their efforts to provide CCP services trade guarantees for credit default swaps ("CDS").

The Trade Information Warehouse ("Warehouse"), as the market's central registry and industry-recognized post-confirm infrastructure for credit derivatives, is optimally equipped to support any and all CCPs that are established in the CDS market. Virtually all dealers and buy-side participants along with 15 third-party service providers in the global CDS market are already linked to the Warehouse and utilize its functionality.

"From the outset of our involvement in the OTC derivatives market in 2003, DTCC has been committed to bringing automation, certainty and reduced risk to trading in CDS and other derivatives instruments," said Peter Axilrod, managing director, Business Development and Deriv/SERV, at DTCC. "By utilizing the Warehouse's post-trade processing infrastructure rather than investing valuable resources to build their own, CCPs can achieve the objectives of CCP clearing—that is, to mitigate and mutualize counterparty risk and increase market liquidity—at the lowest cost and the greatest efficiency to their CCP members. Our support of CCP providers will give the industry standard centralized asset servicing across both cleared and bilateral trades."
The Industry-Recognized Post-Confirm Infrastructure

The Trade Information Warehouse does not act as a central counterparty; however it does serve as the industry's central net settlement and asset servicing platform. Warehouse services include:

* maintaining the official version of each registered contract, thereby providing contract certainty across the market, for both cleared and bilateral transactions;
* publishing on a weekly basis data on notional amounts of contracts outstanding and contract turnover;
* calculating all amounts due on most types of registered contracts;
* providing for centralized, multilateral net settlement of these amounts for participating firms through CLS Bank International, DTCC's strategic partner in providing central settlement of CDS contract fees and coupon payments;
* central processing of credit events and, based on International Swaps and Derivatives Association ("ISDA"®) auction results, calculation of net cash settlements due;
* central processing of successor events and corporate actions; and
* bulk novations when counterparties are merged or acquired, as in Bear Stearns' acquisition by JPMorgan Chase.

The Warehouse also serves as the source of contracts for, and repository of the results of, the industry's portfolio compression and tear-up processes, as well as the source of contracts for automated novation consent services.

CCPs that choose to utilize this full suite of Warehouse services will not need to build and offer these services on their own, thereby reducing the cost of their CCP services to their clearing members and facilitating consistent centralized processing for their clearing members for both cleared and bilateral transactions.
Industry Commitments to Regulators

Deriv/SERV's discussions and systems testing with the four proposed CCPs are at varying stages of advancement, and the proposed CCPs are considering varying degrees of linkages with the Warehouse.

The nature of the Warehouse links each of the proposed CCPs seeks to establish can best be understood in the context of the letter ("the Geithner Letter") sent on October 31, 2008, to Timothy F. Geithner, then President of the Federal Reserve Bank of New York, from the 16 major dealers (Bank of America, N.A., Barclays Capital, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank AG, Dresdner Kleinwort, Goldman, Sachs & Co., HSBC Group, JP Morgan Chase, Merrill Lynch & Co., Morgan Stanley, The Royal Bank of Scotland Group, Société Générale, UBS AG, and Wachovia Bank, N.A.), the Asset Management Group of the Securities Industry and Financial Markets Association, the Managed Funds Association and ISDA.

The industry committed in the Geithner Letter to utilize the Warehouse as follows:

1. The Warehouse (or "TIW") will be the "single, centralized source of industry portfolio statistics to enhance the transparency of the market for participants and supervisors."
2. Firms will "process major life cycle events in the TIW for all electronically eligible confirmable trades including:
1. Clearing automatically processed through the TIW, where applicable.
2. Compression and tear-ups automatically processed through the TIW.
3. Credit Events automatically processed through the TIW.
4. Successor events automatically processed through the TIW.
5. Maturities, expiries and exercises automatically processed through the TIW.
6. Bulk events such as mass terminations and novations automatically processed through the TIW."
3. Regarding central cash settlement of contracts, major dealers committed that by November 30, 2009, "96% of settlement volume on electronically matched transactions across market participants [will be] settled via TIW and CLS."

How It Will Work

CCPs that make full utilization of these Warehouse services will become Warehouse participants whose contracts with their own clearing members will be registered in the Warehouse like any other trades. These contracts will then become eligible for the complete suite of central services set forth above.

The Warehouse can expedite the start-up of any CCP by carrying out bulk novations to the CCP of existing trades originally contracted on a bilateral basis.

The Warehouse's record-keeping and bulk transfer capabilities will enable it to transfer open interest between CCPs—and allow market participants to switch from one clearer to another—thereby facilitating the existence of multiple CCPs.
About DTCC

DTCC, through its subsidiaries, provides clearance, settlement and information services for equities, corporate and municipal bonds, government and mortgage-backed securities, money market instruments and over-the-counter derivatives. In addition, DTCC is a leading processor of mutual funds and insurance transactions, linking funds and carriers with their distribution networks. DTCC's depository provides custody and asset servicing for more than 3.5 million securities issues from the United States and 110 other countries and territories, valued at US$40 trillion. In 2007, DTCC settled more than US$1.86 quadrillion in securities transactions. DTCC has operating facilities in multiple locations in the United States and overseas.

DTCC Deriv/SERV LLC, a wholly-owned subsidiary of DTCC, provides automated matching and confirmation for OTC derivatives contracts, including credit, equity and interest rate derivatives. According to major market participants, over 90% of credit derivatives traded globally are electronically confirmed through Deriv/SERV. The Trade Information Warehouse, a service offering of Deriv/SERV launched in November 2006, is the market's first and only comprehensive trade database and centralized electronic infrastructure for post-trade processing of OTC derivatives contracts over their lifecycles, from confirmation through to final settlement.
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