The Depository Trust & Clearing Corporation (DTCC) announced today it has filed applications to establish a limited purpose trust company that will house the functions of DTCC’s Trade Information Warehouse for credit derivatives. The Warehouse today serves as the world’s central repository for over-the-counter credit derivatives, containing the bulk of all credit derivatives traded worldwide.
The new company, to be called The Warehouse Trust Company LLC, has filed applications for membership in the Federal Reserve system and with the New York State Banking Department (NYSBD) to form a limited purpose trust company and will become a wholly-owned subsidiary of DTCC Deriv/SERV LLC, which operates DTCC’s automated services for OTC derivatives. It is expected that in the new company, the Trade Information Warehouse for credit derivatives will become subject to a collaborative global regulatory scheme involving interested regulators in Europe as well as the US. The new trust company will also establish a subsidiary in Europe to facilitate the offering of regulated Warehouse services in Europe.
"In filing this application to create The Warehouse Trust Company, DTCC is responding to the expressed intentions from regulators globally to bring added risk protection and regulatory oversight to the credit derivatives market," said Donald F. Donahue, DTCC chairman and ceo. "Our goal, as the operator of the only global trade repository for credit default swaps (CDS), is to align our infrastructure in a manner that is consistent with concerns of regulators and market participants and will allow us to continue, and possibly expand, the vital role we play in bringing greater certainty, transparency and reduced risk in the post-trade of OTC derivatives and the servicing of these instruments throughout their life-cycle.
"DTCC’s launch of the Warehouse in 2006, after some years operating the industry’s automated confirmation service for credit derivatives, where these contracts are held in an automated environment, was instrumental in mitigating risk associated with multiple credit events in 2008 and this year. Throughout this period, we have worked closely with customers and regulators globally to strengthen the market’s infrastructure and create greater transparency. Recognizing that these instruments are traded globally, we have, throughout this process, taken a very active approach in communicating with regulators in the U.S. and Europe and have provided them with key market data as needed."
Enhancing Market Transparency
To address regulatory and industry concerns about the need for more transparency in the market, DTCC has, since November 2008, been publicly posting weekly data on its website www.DTCC.com, on open interest and turnover statistics for all credit default swaps. This data includes specific information for each of the top 1,000 single name reference entities and for the various CDS indices as well as aggregated data on a gross and net notional basis.
Supporting Central Counterparty Services for OTC Derivatives
As a market-neutral utility, DTCC has been working with all proposed central counterparty (CCP) solution providers as the market moves towards complying with global regulators’ calls for a process to guarantee the completion of trades in the CDS market.
"We are committed to providing equal access to all CCP providers, so they can leverage our trade repository in delivering their own services more cost-efficiently," said Peter Axilrod, DTCC managing director, Business Development and DTCC Deriv/SERV. "Linking to the Warehouse’s central infrastructure will not only accelerate implementation of CCP processing for OTC derivatives, but will also allow these service providers to focus their development more clearly on margining and risk management without any extraneous operational concerns."
By connecting to the Warehouse, market participants will be assured that life-cycle events for cleared and non-cleared transactions are processed identically and simultaneously, removing the risks that would be created by non-identical or non-simultaneous processing of these events. Market participants can also integrate their own operations with CCPs more efficiently by using the same infrastructure. This will help avoid the potential risks associated with trying to incorporate two separate, and perhaps inconsistent, operational infrastructures.
Additional Background on Deriv/SERV and the Trade Information Warehouse
» The Warehouse’s global services
The Warehouse global customer base includes all of the major credit derivatives dealers and more than 1,400 buy-side firms in 32 countries. As of May 22, the total gross notional value of the approximately 2.3 million contracts maintained in the Warehouse was about US$29 trillion. DTCC is also working with market participants to bring contracts from more customized, or bespoke, instruments such as CDS on collateralized debt obligations into the Warehouse. This is expected to be completed this summer. The Warehouse was designed to be extensible to other OTC derivatives instruments such as interest rates, equities and commodities.
In addition to its global trade repository, Warehouse’s automated services include centralized payment calculations, netting and, in partnership with CLS Bank International, multilateral net settlement of payment obligations between counterparties of a CDS transaction.
» Effectively Managing Multiple Credit Events
In 2008, the Warehouse centrally processed 11 credit events including the Lehman Brothers and Washington Mutual bankruptcies and the insolvencies of the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae) without incident. Year-to-date in 2009, the Warehouse has seamlessly processed more than 30 credit events.
The benefits of DTCC’s central trade repository was recognized by a group of senior financial supervisors from seven countries in their March 9 report, Observations on Management of Recent Credit Default Swap Credit Events. "DTCC’s credit event processing service enabled firms to manage the large number of affected CDS trades during the recent events. All surveyed participants indicated that without the DTCC service and the TIW, the process would have been manual and burdensome and they could not have completed timely processing," according to the report. The report noted that having all CDS trade information in one centralized infrastructure has made it easier for market participants to identify affected trades and facilitate handling of various lifecycle events, such as settlement and credit event processing.
» A single-gateway for OTC Derivatives Processing
In July 2008, DTCC announced the formation of a strategic partnership with Markit Group Holdings Limited (Markit), that it would form a new company combining its Deriv/SERV matching and confirmation platform (but not the Warehouse) with Markit’s electronic trade processing platforms to provide a single gateway for over-the-counter (OTC) derivative transactions. Deriv/SERV has helped market participants move from a manual, error-prone environment for confirming trades, particularly in the CDS market, to a more efficient and streamlined automated process. Increased automation was instrumental in market participants’ ability to meet their commitments to global regulators to eliminate the risks associated with the backlog of outstanding CDS trade confirmations resulting from the then paper-based methods. According to global dealers, more than 95% of CDS transactions are now processed electronically, compared to 15% when Deriv/SERV was first launched.
The strategic partnership is currently awaiting appropriate U.S. and U.K. regulatory approvals.
