Thursday 27th November 2014
NEWS TICKER: THURSDAY, NOVEMBER 27TH 2014: The Straits Times Index (STI) ended -8.70 points lower or -0.26% to 3340.96, taking the year-to-date performance to +5.56%. The FTSE ST Mid Cap Index declined -0.11% while the FTSE ST Small Cap Index declined -0.43%. The top active stocks were SingTel (-0.26%), DBS (-0.25%), ThaiBev (-4.38%), Suntec REIT (+0.26%) and OCBC Bank (+0.10%). The outperforming sectors today were represented by the FTSE ST Health Care Index (+0.47%). The two biggest stocks of the FTSE ST Health Care Index are Raffles Medical Group (-0.52%) and Biosensors International Group (+2.75%). The underperforming sector was the FTSE ST Basic Materials Index, which declined -2.14% with Midas Holdings ’ share price declining -5.09% and Geo Energy Resources’ share price gaining +2.33%. The three most active Exchange Traded Funds (ETFs) by value today were the IS MSCI India (+0.26%), United SSE 50 China ETF (-0.57%), STI ETF (+0.59%). The three most active Real Estate Investment Trusts (REITs) by value were Suntec REIT (+0.26%), Ascendas REIT (-0.86%), CapitaCom Trust (-0.89%). The most active index warrants by value today were HSI24400MBeCW141230 (-15.73%), HSI23800MBePW150129 (+6.45%), HSI23600MBePW141230 (+11.11%). The most active stock warrants by value today were DBS MB eCW150602 (+3.33%), UOB MB eCW150415 (+5.23%), UOB MB eCW150102 (+2.38%) - Moody's has withdrawn the rating of Rossiyskiy Kredit Bank's Caa3 long-term local- and foreign-currency deposit ratings, the Not Prime short-term deposit ratings and the E standalone bank financial strength rating (BFSR), equivalent to a caa3 baseline credit assessment. The ratings agency says the rating has been withdrawn for its own business reasons At the time of the withdrawal, the outlook on the bank's long-term ratings was negative while the standalone E BFSR carried a stable outlook - Malaysian builder MMC Corp Bhd said earlier today that it will list its power unit Malakoff Bhd (IPO-MALB.KL) in a deal bankers expect to raise more than $1bn dollars. The IPO, for up to 30.4% of Malakoff's capital, was deferred earlier this year and approval from the Securities Commission lapsed as a result. MMC, controlled by reclusive Malaysian tycoon Syed Mokhtar Al-Bukhary, will resubmit the application within one month and expects the deal to be completed by second quarter of 2015, according to a local stock exchange filing – According to local press report the newly minted Somalia Stock Exchange expects seven companies in the telecoms, financial services and transport sectors to list when it is set up in 2015. Somalia's economy is slowly recovering from more than two decades of conflict, although the government is still battling an Islamist insurgency. Amid the chaos, some businesses have thrived, including money transfer and mobile phone firms. The Somalia Stock Exchange has opened administrative offices in Mogadishu and other Somali centres like Kismayu, as well as in Nairobi, to help recruitment and in other related issues - Moody's has upgraded to Baa1 from Baa2 the long-term deposit ratings of China CITIC Bank International Limited, and affirmed the bank's P-2 short-term deposit ratings. The bank's senior unsecured MTN program rating and deposit note/CD program ratings are also upgraded to (P)Baa1/Baa1 from (P)Baa2/Baa2, while the short-term deposit note/CD program ratings are affirmed at (P)P-2. The bank's baseline credit assessment (BCA) is unchanged at baa3. The outlook on all the ratings is stable. The rating action concludes Moody's review for upgrade for China CITIC Bank International, which was initiated on September 2nd this year, after the senior unsecured bond rating of its ultimate parents CITIC Group Corporation and CITIC Limited (formerly CITIC Pacific Limited) were upgraded to A3 from Baa2. CITIC Group Corporation, wholly owned by China's Ministry of Finance, owns 78% of CITIC Limited, which in turn owns 67% of China CITIC Bank.

The Imperative of Automating Derivatives Processing

Tuesday, 01 March 2005
The Imperative of Automating Derivatives Processing The over-the-counter (OTC) derivatives market is on a roll of its own. Worth some $173trn (in notional value) according to the International Swaps and Derivatives Association (ISDA), deal volume is up by $30trn over 2003 and the market is expected to continue at a double-digit pace for some time to come. This growth trajectory has, however, simultaneously raised both the level of operational risk and the costs of manually processing this magnitude of contracts. The market must automate in order not to be overwhelmed by its own success. Peter Axilrod, managing director of new business development for The Depository Trust & Clearing Corporation (DTCC) writes from New York. http://www.ftseglobalmarkets.com/
The over-the-counter (OTC) derivatives market is on a roll of its own. Worth some $173trn (in notional value) according to the International Swaps and Derivatives Association (ISDA), deal volume is up by $30trn over 2003 and the market is expected to continue at a double-digit pace for some time to come. This growth trajectory has, however, simultaneously raised both the level of operational risk and the costs of manually processing this magnitude of contracts. The market must automate in order not to be overwhelmed by its own success. Peter Axilrod, managing director of new business development for The Depository Trust & Clearing Corporation (DTCC) writes from New York.
The fastest growing area of over-the-counter derivatives is credit default swaps. These instruments have proved to be an essential part of controlling credit exposure for major dealers and the financial system as a whole. “The market for credit derivatives has grown in prominence not only because of its ability to disperse risk, but also because of the information it contributes to enhanced risk management by banks and other financial intermediaries” noted Alan Greenspan, chairman of the United States’ (US’s) Federal Reserve Board (the Fed), back in 2003 in referring to financial derivatives. “As the market for credit default swaps expands and deepens, the collective knowledge held by market participants is exactly reflected in the prices of these derivative instruments. They offer significant supplementary information about credit risk to a bank’s loan officer, for example, who heretofore [sic] had to rely mainly on in-house credit analysis,” he concluded.

Until a few years ago, the low volume and high degree of customised terms in credit default swaps and other OTC derivatives almost necessitated manual post-trade processing in a paper-based environment. Trading and confirmation were done via phone calls and faxes. It was not particularly burdensome as volumes were (generally) low.



In the first half of 2000, the ISDA estimated there were about $60trn (in notional value) in interest rate and currency swaps outstanding, with little or no measured activity in credit default swaps or equity derivatives. By the first half of 2002, the same survey shows about $82.7trn notional value in interest rate derivatives, some $1.5trn in credit default swaps, and $2.3trn in equity derivatives. It is a very different picture these days. In the latest survey for the first half of 2004, interest rate derivatives stands at $164.5trn notional value, credit default swaps were at $5.4trn and equity derivatives at $3.8trn outstanding.

As the market for these instruments has exploded in the past few years, there has been an increasing need to develop an electronic, automated system for matching and confirmation. Prior to the advent of automated confirmation systems, it averaged over four weeks to confirm a credit default swap – a situation that was absolutely incompatible with the explosive market growth we have recently seen. With the advent of master confirmations for credit default swaps, which standardised most terms of any contract, buyers and sellers could complete legally binding credit default swaps on short-form transaction supplements by agreeing to as little as 20 or so elements of transaction data. That made automated matching and confirmation of trades in these instruments feasible.

Recently, ISDA has also established master confirmation agreements for equity options and variance swaps, with master confirmation agreements for equity swaps nearing completion as well. Automated matching of trades in these products can be expected to increase as master confirmations are adopted by ever-expanding groups of industry participants.

Although there are no master confirmations for interest rate derivatives, industry practice has given rise to generally accepted “intelligent default” values for most of the items to be specified in the standard ISDA confirmations for these products. [Intelligent defaults are values that are not fixed for all contracts, but rather are fixed depending upon values of basic business terms.] The existence of these sorts of standard industry practices has facilitated the automated confirmation and matching of interest rate derivatives as well.

Addressing Industry Concerns

Recognising the need for automation, ISDA, in a report issued late in 2003, set an aggressive timetable for automating the OTC derivatives marketplace, calling for the automated matching and confirmation of most derivatives trading by the end of 2005, and the related cash flow payments reconciliation and netting by 2006.

Fortunately, the industry had already begun responding with solutions before the report was issued, and it appears that there will be service offerings available to permit the ISDA goals to be met. While different solution providers have taken different approaches to automation, the key goals are the same: to provide ways for firms to match and confirm trades through the use of real-time systems, and if there are mismatches, to find quick and easy ways to correct those mismatches, while providing firms with the maximum transparency throughout the confirmation process.

A key way to achieve this is to provide a way that both counterparties are required to submit their transaction details for matching.

One of the major advantages of having a two-sided automated matching process is that it allows individual firms to operate in a very high control, post-trade environment. The automated flow of information, beginning with trade capture and flowing directly through to a central matching utility, will eliminate the risk that a market participant can legally confirm a trade that does not comport their understanding as recorded at the time of trade. This sort of automated trade matching not only reduces risk by reducing the time to confirmation, but also reduces error by virtually eliminating mistaken confirmation.

However, any automation, even using a one-sided submission and affirmation by the contra-party, provides a much more rapid review and correction of the confirm process than paper-based manual systems. As noted above, such paper-based confirms could literally take weeks to complete – a huge risk, given the size and complexity of some of these transactions.

Using automated real-time matching systems, firms can quickly and efficiently match and confirm OTC derivatives by having both parties to the contract input details about the transaction to a service provider. In turn, the service provider, at a minimum, identifies any unmatched entries and automatically notifies both parties of the mismatches. Some systems can even suggest the best possible matches for the mismatches.

This has helped to spur a wave of new services by a host of different organisations, each initially focused on offering a confirmation service for a different OTC derivative, although many of these services are now being broadened to include a wide range of OTC derivative transactions. The leading providers of these automated confirmation services are DTCC, SwapsWire and SWIFT, but there are others. Some also offer cash flow reconciliation or settlement systems as well.

These services have only come into widespread use over the last year or so (despite some having been available for much longer). Nonetheless, they have already significantly improved the confirmation and back office operations of major market participants. Nowhere has the improvement been more dramatic than in the credit default swaps area, where, prior to the advent of automated confirmation of these transactions, the average time to confirmation among major dealers exceeded four weeks.

While these services can and are helping, the biggest problem may be getting firms to use them, giving up their manual ways. And much of the required automation that must take place is within the firms who trade in these instruments. Increasingly, a number of vendors are beginning to develop and offer off-the-shelf middleware that provides the control and monitoring necessary, and connect to automated matching services, but for many firms, the software development is something that must still be undertaken in-house.

One of the accommodations that some central confirmation utilities have made to increase the level of automation and confirmation is to provide a way for firms, especially buy-side firms such as hedge funds that may be small or be limited in the level of automation they have available, to connect to the service using the Internet and a browser over a secure connection.

The most rudimentary use of a browser connection is to permit firms to review and affirm on-line trades submitted to an automated confirmation facility by their counterparties. More importantly, however, some providers have adapted the browser connection to allow lower volume firms to obtain most of the benefits of two-sided trade matching without making very expensive technology investments. They do this by permitting the safe and secure upload of a properly formatted spreadsheet containing all of the transaction data necessary to perform matching. Such uploaded spreadsheet data is then processed through the matching system, with results able to be reviewed in real-time.

In its most rudimentary form, use of such browser-based connections essentially means there is no requirement for programming internally in order to use these automated confirmation services. A connection can be completed even via low-cost dial-up Internet service. In the case of DTCC’s OTC derivatives matching service, while virtually all of the 20 major dealers who use the matching and confirmation service use a mainframe-to-mainframe connection, the 40 or so (as of mid-January) hedge funds and other buy-side firms use a mix of mainframe-to-mainframe, spreadsheet uploads and affirmation of trades using the individual browser fields.

As the trading in OTC derivatives grows, these automated matching and confirmation services can provide the essential connectivity between trading parties that, with standardisation approved by the ISDA, such as FpML, will make it far easier to match, confirm and make payments on a global basis for these complex, but increasingly essential instruments. Firms themselves will have to decide what level of automation they need to monitor and control the use of these derivatives in their businesses, but that need will surely grow in the future as well, because these instruments have significant risk connected to them as an inherent part of their nature.

By automating the infrastructure, these new services have the potential to spur greater productivity, greatly reduce and manage both operating and credit risk and increase trading volumes in an increasingly important arena set for greater expansion.

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