The Depository Trust & Clearing Corporation (DTCC) announced today the selection of CLS Bank International (CLS) to provide central settlement of payments for over-the-counter (OTC) derivatives contracts housed in DTCC Deriv/SERV’s Trade Information Warehouse.
The partnering of these two industry-owned organizations will provide an integrated global payment processing infrastructure for the OTC derivatives market, linking the Trade Information Warehouse with a central settlement facility. Initially supporting credit derivatives, the solution is designed to be extended to other OTC derivatives products including rates, equities, and commodities – the timing of which will be determined through collaboration with warehouse customers.
"This strategic partnership will provide an automated, seamless processing and settlement environment for the handling of OTC derivatives contracts on a global basis," said Robert McGrail, executive managing director, Domestic and International Core Services, DTCC. "After an extensive review and selection process by DTCC and its Board’s OTC Derivatives Operations and Planning Committee, CLS became the logical choice because of our shared customer base, and CLS’ reputation for resiliency, reliability and broad experience handling foreign exchange."
CLS provides global settlement services in 15 currencies, and is an integral part of the foreign exchange market, settling 270,000 instructions equivalent to approximately $2.9 trillion each day. Like DTCC, CLS operates on an "at cost" basis for the benefit of the financial services industry.
"Leveraging CLS’ existing settlement infrastructure and global reach, including 57 member banks and 800-plus international banks, brokers and other customers who access CLS indirectly as third-parties through members made CLS the logical provider," said Guido Buehler, managing director, UBS Investment Bank, and member of DTCC’s OTC Derivatives Operations and Planning Board Committee. "CLS will support the settlement of warehouse payment obligations in the 9 trade warehouse currencies currently supported with the option to add more currencies in the future."
Combining Strengths to Transform a Market
"We are pleased to be partnering with DTCC, bringing together Deriv/SERV’s strength in automating OTC derivatives processing with CLS’ multi-currency expertise and robust settlement infrastructure. It is excellent to see the financial industry leveraging the CLS infrastructure," said Rob Close, President and Chief Executive Officer, CLS Bank International. "We share DTCC’s vision of a strategic partnership that will support the global expansion of the OTC derivatives market and reduce cost and risk, and CLS is committed to working with DTCC to expand this solution to other OTC derivatives products over time."
While most OTC credit derivative transactions are now matched and confirmed electronically through Deriv/SERV, market participants still bilaterally settle payments over the life of each contract in a fragmented and non-standardized manner. The Trade Information Warehouse automates and centralizes the most up-to-date information about a derivatives contract, and will link this data with CLS’ electronic settlement process, so that payments will take place automatically, resulting in more efficient, accurate and complete payment processing.
Through CLS, warehouse customers will gain settlement certainty – all payment instructions generated by the warehouse and settled by CLS will be final and irrevocable in immediately available funds. The Deriv/SERV warehouse will receive real-time information on the status of all payment instructions that have been submitted to CLS Bank.
DTCC launched the Trade Information Warehouse in November in close collaboration with key OTC derivatives market participants, creating a centralized and secure global post-trade processing infrastructure. The warehouse builds on DTCC’s Deriv/SERV platform, which today automates confirmations for more than 80% of credit derivatives trades globally.
The Request for Proposal process began in September, and involved confidential discussions with a number of financial institutions. The decision was finalized last week by DTCC and its OTC Derivatives Operations and Planning Board Committee. DTCC and CLS will begin working immediately to complete the necessary connectivity and development, as well as legal arrangements and necessary regulatory approval, required to deliver this seamless solution to the marketplace. A definitive timeframe for implementation of this new settlement capability will be announced in 2007.