MarkitSERV sees 48% clearing volume rise

Aug 27, 2013
MarkitSERV sees 48% clearing volume rise

Post-trade processing specialist specialist MarkitSERV has seen a jump in buy-side subscriptions as Dodd-Frank Act rules mandating post-trade reporting and clearing of OTC derivatives kicked in.

The firm also saw a significant jump in use of its clearing connectivity service, which processed over 600,000 trades between March 11 and the end of July.

In anticipation of new clearing rules, the volume of trades submitted for clearing through MarkitSERV leapt up 48% from the same period in 2012. This figure includes more than 120,000 “client” trades, those in which at least one party is not a member of a clearinghouse. Over 300 new buy-side subscribers signed up after they were phased into the regulations requiring the post-trade reporting and clearing of certain OTC derivatives in June.

MarkitSERV recently added LCH. Clearnet to its roster of clearing providers in June. Other CFTC-registered derivatives clearing organisations (DCOs) with connectivity to MarkitSERV include CME, ICE Clear Credit, ICE Clear Europe, LCH.Clearnet’s SwapClear US and UK, and Options Clearing Corp.

It is also linked with Eurex Clearing AG and LCH. Clearnet-owned CDSClear, which both have DCO applications pending.

The mandatory clearing of certain OTC derivatives, including interest rate swaps and credit default swaps, came into effect on 11 March and is being implemented in three stages. Most buy-side firms were required to comply with the rules from 10 June.

Henry Hunter, managing director and head of product management for MarkitSERV, said: “The CFTC’s Category 2 deadline affected a large number of firms and the industry has accomplished a lot in a short time. MarkitSERV gives customers a practical cross-asset solution that helps them process, clear and report OTC derivative transactions.”

Welcome to the Cleared Swaps World – Sign Here, Please

Welcome to the Cleared Swaps World – Sign Here, Please

The final wave of the swaps clearing mandate will hit in September. But entering into a clearing agreement doesn’t mean swaps trading will be risk-free, as CCPs hold the potential to be an extraordinarily risky part of the market.
As the last customer types prepare for the clearing of swaps in September, people are becoming more aware of the implications of clearing agreements and the relationships among the customer, his FCM and the CCP. However, there are a few reasons to be particularly careful in executing clearing agreements.

As a bit of background, the requirement to use CCPs actually serves to concentrate counterparty risk, at least for large players. Imagine a swap dealer (SD) that has $100 billion in exposure to 1,000 separate counterparties, converting that to $50 billion in exposure with each of two CCPs. Clearly, there has been a significant concentration of risk. Not a problem if the CCP is risk free; but a potential problem if it isn’t.

[Related: “A Familiar Model Emerges for Swaps”]

Now let’s look at the market – not the market for swaps or even clearing services, but the market for CCPs themselves. If a significant number of CCPs are chasing a finite volume of clearing, we might expect them to find ways to compete. One of those ways might be in initial margin, particularly on bespoke products. This “race to the bottom,” if it surfaces, could easily make CCPs an extraordinarily risky part of the market.

Finally, we need to understand the nature of financial panics. They always begin as muffled rumblings in the distance – trouble for someone else but not for us. Then the trouble spreads, and the market starts buzzing with rumors. At some point, the trouble reaches a tipping point, and everyone rushes to get out. At that point, it may be too late to save anyone’s bacon, no matter whom they clear through.


In light of all this, the International Organization of Securities Commissioners (IOSCO) and the BIS Committee on Payment and Settlement Systems (CPSS) have jointly issued a consultation document they call “Recovery of Financial Market Infrastructures.” In the introduction they say, “‘Recovery’ concerns the ability of a Financial Market Infrastructure (FMI) to recover from a threat to its viability and financial strength so that it can continue to provide its critical services without requiring the use of resolution powers by authorities. Recovery therefore takes place in the shadow of resolution.” In other words, this document addresses the worst of all worlds for market participants.

The report spends the first 10 of its 23 pages talking about recovery planning, certainly an important requirement. But then the report gets into recovery tools, and here’s where it really gets interesting. In Section 3.2 the report says, “FMIs can be exposed to legal, credit, liquidity, general business, custody, investment and operational risks. … The manifestation of the risks may have different causes and may also result in different types of failure scenarios.”

But the most startling section of the report is Section 3.5, “Tools to allocate uncovered losses caused by participant default.” This gets into the very difficult subject of who pays when a large default exhausts the CCP’s resources. Things get really interesting in Section 3.5.14, where the report says:

“An important example of a position-based loss allocation recovery tool is variation margin haircutting by CCPs. When haircutting variation margin, the CCP reduces pro rata the amount it is due to pay participants with in-the-money (net) positions, while continuing to collect in full from those participants with out-of-the-money (net) positions… Where a CCP does not have a direct contractual relationship with indirect participants (ie clients of direct participants [or customers of FCMs]), the impact on such indirect participants will depend upon their contractual arrangements with their respective direct participants.”

So if you have a winning position with the wrong CCP – one that might clear for a big loser or two – you might not get some of your winnings.

The final wave of the swaps clearing mandate will hit in September. But entering into a clearing agreement doesn’t mean swaps trading will be risk-free, as CCPs hold the potential to be an extraordinarily risky part of the market.
And this vulnerability isn’t restricted to VM. In a paragraph that has garnered lots of publicity, Section 3.5.19 says:

“Initial margin haircutting could be limited to the initial margin of direct participants. On the other hand, the tool could be applied to the margin of all participants (direct and indirect) providing this is consistent with the laws and regulations to which the CCP is subject and the rest of the CCP’s rules. Like variation margin haircutting, even where the CCP applies margin haircuts only to direct participants, the contractual arrangements between direct participants and indirect participants may cause the haircutting to have an impact on indirect participants.” (Emphasis added)

So if a market participant has a winning position, but clears at a CCP that is in trouble, not only could the market participant’s VM be withheld, its IM could also disappear into the financial black hole. Not a pretty thought!

Some Legal Advice

So it is especially welcome that attorney Sherri Venocur has written an informative article called, “What Customers Should Look Out For in FCM Clearing Agreements.” In one section, she cautions:

“Section 724(a) of Dodd-Frank restricts an FCM’s use of its customer’s collateral and specifies the instruments into which an FCM may invest its customer’s collateral. Nonetheless, most Clearing Agreements give the FCM the right to rehypothecate collateral and otherwise to deal with it as though it were the FCM’s own property… Thus, customers should push for the inclusion in the Clearing Agreement of a provision containing language similar to that in the proposed rule, and it would seem unreasonable for an FCM not to agree to include it.”

Another point Ms. Venocur makes is that banks that are FCMs often have many affiliated entities that perform related functions, such as trading, lending, or money transfer. A clearing customer may have relationships with some of those affiliates, so, she says:

“It is most important for the customer to understand the possible consequences of [any] cross-affiliate provisions in light of the customer’s particular circumstances. To that end, the customer should: (i) review the customer’s existing relationships with the Bank and inquire about anticipated future relationships; (ii) review all documents relating to such relationships; and (iii) based on this review, (A) understand what actions the Bank can take with respect to the customer or its property in the event the customer defaults or another circumstance occurs that gives the Bank the right to take certain actions (either specified or described broadly in the documents) and (B) understand what remedies are available to the customer in the event the Bank breaches its obligations under its various agreements with the customer or the customer otherwise wishes to terminate one or more relationships with the Bank.”

In conclusion, Ms. Venocur says:

“The implementation of Dodd-Frank and the regulations promulgated thereunder marks a radical change in the way OTC derivatives are executed, documented and implemented. While ISDA Master Agreements continue to be required, customers also need to execute Clearing Agreements with FCMs so that they can enter into derivative transactions that are subject to the mandatory clearing requirement. It is essential that customers understand the risks within Clearing Agreements and negotiate these agreements with their FCMs in order to reduce or at the very least, to manage, such risks.”

Technology, Transparency and Choice Drive Buy Side’s Investment in U.S. Options

Technology, Transparency and Choice Drive Buy Side’s Investment in U.S. Options

Volumes in the options market are estimated to increase by more than 5 percent as electronic trading fuels access to the U.S. marketplace.
The U.S. market for exchange-traded options took off during the past decade. The buy side is increasingly looking at options as instruments to hedge risk exposure and generate alpha, according to TABB Group’s recent report on the state of the U.S. options markets. In fact, TABB estimates that volumes will increase by more than 5 percent by year-end, even as market volatility wanes. So what is continuing to fuel growth in the options markets?

[Related: “Buy Side Is Getting Smarter at Trading Options”]

Market transparency and growing adoption of electronic trading technologies are key contributing factors. The changes in regulation and increasing use of electronic trading helped raise volume an average of 21 percent a year from 2000 to 2010 on seven U.S. options exchanges. Today, the options markets are supported by 12 exchanges and electronic venues where traders can access legitimate, reliable prices and order information so they can confidently and quickly execute a trade.

While the increase in trading venues has increased competition and lowered transaction costs for investors, fragmentation has also forced continued investment in technology on both the sell side and buy side. One area of investment on the buy side is platforms that help aggregate liquidity across multiple counterparties and exchanges. To access liquidity and capitalize on momentary market opportunities, institutional investors are adopting electronic platforms that offer integrated pricing monitors, trade analytics, risk monitors, and other tools. For the second year in a row, TABB’s study found Bloomberg Execution Management System (EMSX) is the most popular electronic trading platform for U.S. options. Now, I may be biased, but what I believe this reveals is that options market participants value unparalleled technology and transparency – but they also value choice.

With trading volumes stagnant in the past few years, the buy side has also sought to balance technology and commission spend with necessary efficiency drivers. Especially among hedge funds, the desire for un-conflicted choice has fueled growth in broker-neutral electronic platforms that connect to a broad network of brokers, functionality algorithms and counterparties.

From hedge fund traders looking for an edge, to long-only asset managers that use options to manage risk, electronic trading is fueling access to the U.S. options marketplace. As the industry evolves and trading options becomes even more commonplace for the institutional investor, platforms that offer the buy side choice, access and sophisticated trading tools will succeed along with the market itself.

OTC Client Clearing – new market

OTC Client Clearing – new market
Posted on July 11, 2013 by Ravikanth Borra
With the new regulations, clearing is mandatory for OTC derivatives. Not every bank and financial and non-financial institution will become direct member of CCP clearing house because of high fees (default fund fees). So the small banks and financial/non financial participants in OTC market will be looking out and will opt for Clearing Member/Bank who will provide OTC Clearing as service, without the high membership fees.

Ultimately the banks will be looking for clearing members who can help them sail through the regulations, and not let them bother with all the additional rules. They are not looking for price arbitration, or choose a product off the shelf. Clients are buying something that is brand new and they want to know how it works, how the regulatory environment is changing, and how they’ll be affected

Thus Client clearing the new business is born, which is provided by big banks who are direct members of clearing house and who will be providing OTC clearing as service. As of today the market is in its very early stages. There is only probably max 10 firms in Europe who has the capability to provide client clearing service, but this number will grow, how large, depends on the market.

The OTC derivatives market is clearly very big (in trillions or more) and the margin requirements (will be in billions) if have to be met, the required collateral margin acceptable by CCP i.e cash/treasury if has to match with the market size will be very difficult. This will add a very tight squeeze on liquid cash available in the market to the extent that market can no longer function.

This is where the client clearing can come to help. The clearing members can be more lenient than the CCP in terms of acceptable collateral. Also clearing members can theoretically reduce the margin needs by cross netting the cleared and uncleared products. This market is very much still on paper and will be driven by the regulatory needs and the market reaction

The regulations are put on to standardize the OTC markets. The size of market dictates that all the regulations could not be implemented as desired, so either the size of market has to reduce or the market itself should find ways which is the usual case.

Client clearing market can help the OTC market to find a way to implement the regulations and at the same time allow the market to function in its operative ways. Well this is still starting and so wait and watch .

Cross-product margining arrangements

Clearing members could also charge clients less than the CCP’s minimum – an area in which some dealers are hoping to put clear water between themselves and the competition. Although CCPs will break-up offsets between cleared and uncleared products, some dealers promise to continue calculating client margin as though cross-product netting was still achievable.

There could be offsets across cleared products and uncleared products done bilaterally where the clearing broker is also acting as prime broker on bilateral trade. This is possible theoretically and so wait until market dictates the needs.

As the competition heats up over the days, probably there would be difference in the views from European banks and non European (US/Japanese). The European banks are known to conservative in their approach, and US banks may come up with new and interesting products/services.

Collateral for Margin
One more aspect where clearing brokers can help is if the clients dont have the right kind of assets required by CCP to be posted for Initial Margin purposes, probably clearing member can be more lenient, to allow collateral other than cash/government bonds.

CCP Central Clearing – Credit Risk

CCP Central Clearing – Credit Risk

Posted on July 10, 2013 by Ravikanth Borra
The basic premise of ccp central clearing is to “eliminate” the counterparty risk of the individual banks or financial entities participating in the transaction. So on the outset this looks like central clearing should make life easier for credit risk manager

However in reality we are “shifting” the credit risk from banks and non-bank financial entities to CCPs. So instead of eliminating we have created new type of risk CCP Risk concentrated with CCPs

CCPs are not central banks, neither non-profit organisations. CCPs are private-sector, profit making entities operating in competitive environment. The default of CCP is probably almost next to impossible with the kind of controls kept in place, but still there is a possibility and should be considered by credit risk team. So exposures to CCP should be measured and monitored

CCP Exposure Measures
1. Net market value of open positions
2. Initial and variation margins posted to CCP
3. Default fund contributions (funded and unfunded)

Exposure to bilateral counterparty
One important aspect that should be monitored is the the possibility of transaction to be rejected by CCP , in which case the transaction remains bilateral despite the initial intention to clear. If the rejection is because of higher exposure you have against the bilateral party, then the trade cannot be cleared. By adding checks before submitting to CCP novation would be of no help, we cannot back-out of the transaction legally now. The necessary checks should be done in pre-deal or before signing the deal with the bilateral party

Therefore it is a very important step to be added in the operational processes of banks to monitor and ensure the exposures to the different bilateral counter-parties exists under the CCP Limits, even though the trade is novated

CCP Solvency – CDO
Assessment of CCP solvency is compared similar to CDO (Collateral Debt Obligation) problem with several tranches of protection akin to CCP default “waterfall” model

EuroCCP Adds Deutsche Bank Frankfurt as clearing participant

The EuroCCP European cash equities clearing house has signed up Deutsche Bank Frankfurt as a general clearing participant (GCP) on its platform. A GCP is a firm that clears trades on its own behalf and for other trading firms who are not EuroCCP participants, widening its reach.

via Pocket July 02, 2013 at 07:28PM

Eurex Clearing said it launched Eurex Clearing Prisma, a risk management system that applies a portfolio methodology

Eurex Clearing said it launched Eurex Clearing Prisma, a risk management system that applies a portfolio methodology

Frankfurt – Eurex Clearing said it launched Eurex Clearing Prisma, a risk management system that applies a portfolio methodology.

The new system will be rolled out for all products cleared by Eurex Clearing and will replace the current Risk Based Margining methodology.

Eurex Clearing said that by capturing risk reducing portfolio effects, Prisma promotes hedged positions and increases capital efficiency.

“After full roll-out, Eurex Clearing will, as the first major clearing house, apply a single consistent methodology and system across all asset classes cleared including listed and OTC products and thereby increase operational efficiency,” the company said.

Eurex Clearing Prisma applies a simulation-based Value-at-Risk model which covers historical and hypothetical stress scenarios


via Pocket June 28, 2013 at 07:50PM

Vietfund Management taps Deutsche Bank for custody, fund services

The Asset – Magazine-Vietfund Management taps Deutsche Bank for custody, fund services.

Traiana, the leading provider of post-trade solutions, announces it is to launch direct connectivity between Traiana’s Harmony CCP Connect and LCH.Clearnet Ltd’s

New York/London, 20 June 2013 – Traiana, the leading provider of post-trade solutions, announces it is to launch direct connectivity between Traiana’s Harmony CCP Connect and LCH.Clearnet Ltd’s (LCH.

via Pocket June 20, 2013 at 06:42PM

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