AMD Speaks on CDS Automation
AMD Executive Committee member James Wallin of AllianceBernstein answers questions on the CDS market and the development of the Trade Information Warehouse in a special video interview with Joseph Sack of The Bond Market Association. Mr. Wallin discusses why Wall Street is focused on credit derivatives and how the buy side is working with the Group of 14 Dealers and DTCC to develop a Warehouse for confirmed CDS trades by November 1, 2006.
Click here to view the interview and learn how asset managers can use the Warehouse to address the processing challenges that currently face the market.
STATEMENT BY THE ASSET MANAGERS DIVISION OF THE BOND MARKET ASSOCIATION ON DTCC TRADE INFORMATION WAREHOUSE
The Asset Managers Division ("AMD") of The Bond Market Association and Managed Funds Association ("MFA") are participating with the major OTC derivatives dealers in the DTCC Senior Oversight Group ("SOG") as representatives of the buy side. SOG is developing the DTCC Deriv/SERV Trade Information Warehouse ("Warehouse") for credit derivative transactions. The initial release of the Warehouse began user testing on September 18, 2006, and is expected to be ready for live production on or about November 1, 2006.
Trade Information Warehouse
The Warehouse will consist of a central trade information repository for credit derivatives - essentially a comprehensive database containing the "official legal record" (golden copy) of each trade - and a central support infrastructure that standardizes and automates downstream processes throughout the life of each contract, eliminating the need for multiple bilateral processes between thousands of pairs of counterparties. Ultimately the central settlement (and other "downstream") processes will operate in a manner that mirrors the processing of central securities depositories such as DTCC.
The purpose of the Warehouse is to facilitate the orderly growth of OTC derivatives markets worldwide by significantly reducing trade administration costs and risks, and encouraging competition among providers of other value-added services. As with other DTCC offerings, the Warehouse itself will be operated as a true industry utility.
AMD Supports Automated CDS Processing
The AMD fully supports and endorses the Warehouse as the trade repository for CDS derivatives.
After the implementation of the Warehouse, all new trades confirmed through Deriv/SERV will be automatically posted in the Warehouse. The AMD also urges asset managers to input (into the Warehouse) CDS trades executed prior to the inception of the Warehouse in order to achieve efficient and accurate downstream processing. This process is referred to as "backloading."
The AMD urges third-party commercial providers to enable asset managers to efficiently and effectively link to the Warehouse in order to derive the benefits of the Warehouse's downstream processing of CDS lifecycle events. Furthermore, the AMD encourages vendors to work with their buy side clients to assist in backloading trades into the Warehouse.
Regulatory Underpinnings
The major OTC derivatives dealers have agreed with the NY Federal Reserve Bank and other regulators to work with their buy side clients to implement certain industry-wide processing guidelines for credit derivatives by October 31, 2006. These guidelines were endorsed by The Bond Market Association, Managed Funds Association and ISDA in a letter dated July 19, 2006, from those organizations and the major dealers to the buy side participants in the credit derivatives market. (See attached "G-14 Client Letter").
Under the guidelines, dealers are obliged to electronically confirm all eligible trades with "active" institutional investors, i.e., those transacting at least 4 trades per month with any one dealer, and also to electronically confirm all confirmable post-trade events. Eligible trades currently constitute all single names, indices and tranched indices; confirmable post-trade events include novations, terminations, increases and amendments.
These guidelines will enable the Warehouse to begin maintaining the official legal record of each new trade entered into the Warehouse after the "go live" date. Beginning on that date, the DTCC Deriv/SERV trade confirmation service for credit derivatives will automatically feed the Warehouse, and it will be the responsibility of each firm using the service to adhere to the guidelines and confirm all post-trade events electronically to make sure the Warehouse contract records are appropriately updated.
Asset Managers Interfacing with the Warehouse
On and after the Warehouse "go live" date, all asset managers confirming trades through Deriv/SERV will be users of the Warehouse. An asset manager can elect to access Deriv/SERV directly or use the services of a commercial provider in order to post legally confirmed trades in the Warehouse.
At the behest of the AMD and MFA, a number of providers expressed interest in helping the buy side to backload credit derivative trades into the Warehouse. The names of providers are available from DTCC upon request.
Testing with the Warehouse
On September 18, 2006, dealers and Deriv/SERV began testing the functionality of the Warehouse. Asset managers have the option to participate in the test and are encouraged to begin backloading trades into the Warehouse subsequent to its successful test.
Warehouse Eligible Transactions
The initial Warehouse Eligible Transactions will be single name CDS (both corporate and Sovereign using master confirmation agreements, default master confirmation agreements or the ISDA physical settlement matrix), CDS Index products, and Tranched index products, all being confirmable through Deriv/SERV confirmation services as of June 1, 2006. Additional credit derivative products will be added in 2007 to achieve complete coverage of this asset class. It is also the intent of the Deriv/SERV Board to extend the Warehouse to other OTC derivatives, including rates, equities, FX, and commodities derivatives, with the timing of any such expansion to be determined based upon user demand and the success of prior implementations.
Next Steps
In the next few months, DTCC will:
- Release a comprehensive description of the backloading process, which is efficient and contains simplified break resolution. The AMD will work with DTCC and other constituents to develop educational materials that clearly articulate the back loading process.
- Provide procedures for controlled access to an asset manager's trade records based on a "permissioning" control to the asset manager and their designated representatives.
- Provide comprehensive reports and reconciliation information available to the asset manager.
In 2007, the AMD will continue as partners to work with the G-14 dealers and DTCC on the Warehouse and release additional automated services and functionality providing asset managers with increased automation of down-stream processing:
- Calculation of payment obligations
- Central settlement of payments
- Processing of credit events
- Maintenance of basic economic information of highly structured trades that are not eligible for legal confirmation through Deriv/SERV
Additional Information
The AMD will continue to provide additional education relating to the development of the Warehouse. For further information on the Warehouse, please refer the following links or contact George Reis of The Bond Market Association at 646.637.9280 or at greis@bondmarkets.com.
Links
Trade Information Warehouse A Practical Guide for the Buy Side