Friday 3rd July 2015
NEWS TICKER: THURSDAY, JULY 2nd 2015: Deutsche Börse says a new iShares ETF from BlackRock's product offering has been launched on Xetra and Börse Frankfurt today. The iShares MSCI EMU USD Hedged UCITS ETF launched on Xetra ETF provides access to euro-zone equities with currency hedging against US dollar. The exchange organisation says the ETF enables investors to participate in the performance of stock corporations in the euro zone while also benefiting from currency hedging against the US dollar. This protects investors against an appreciation of the US dollar against the euro. - The Straits Times Index (STI) ended 3.3 points or 0.1% lower to 3327.84, taking the year-to-date performance to -1.11%. The top active stocks today were UOB, which gained 0.82%, DBS, which closed unchanged, Singtel, which declined 0.24%, CapitaLand, which declined 1.13% and Global Logistic, with a 0.78% fall. The FTSE ST Mid Cap Index declined 0.06%, while the FTSE ST Small Cap Index rose 0.02%. The outperforming sectors today were represented by the FTSE ST Basic Materials Index, which rose 0.82%. The two biggest stocks of the Index - Midas Holdings and NSL- ended 1.59% higher and 0.67% lower respectively. The underperforming sector was the FTSE ST Real Estate Investment Trusts Index, which slipped 0.67%. CapitaLand Mall Trust shares declined 2.30% and Ascendas REIT declined 2.41% - According to Flightglobal, China’s state aviation supplier has tentatively signed for up to 75 Airbus A330s in an agreement which will help bridge a production gap to the re-engined A330neo. General terms of the agreement inlcude an order for 45 jets plus a memorandum of understanding for another 30 options. The deal took place during an official visit to France by Chinese premier Li Keqiang. Airbus has long been negotiating the landmark agreement following a preliminary deal to establish an A330 completion centre in Tianjin. The pact with China Aviation Supplies Holding, which is likely to include several aircraft configured in the lower-weight regional version. Meanwhile, Airbus CEO Fabrice Bregier says the package is a “new vote of confidence” in the twinjet. “China is today the most important market for aviation in the world,” he adds - Morningstar has upgraded the Royal London UK Equity Income fund to a Morningstar Analyst Rating of Silver. The fund was previously rated Bronze. Experienced manager Martin Cholwill has, over his decade-long tenure on the fund, consistently applied his proven investment process to good effect. His strategy is sensible for delivering yield and competitive total returns for investors, with a focus on free cash flows and valuations. The fund also enjoys a cost advantage over its rivals, with ongoing charges lower than the category norm. These factors have led to a strong and consistent performance profile over a number of years - The amount of outstanding Euro commercial paper (CP) and certificates of deposit (CD) declined significantly in the week ending July 1st, according to CMDPortal data. Outstandings dropped by $11.80bn to $861.59bn during the week. Sovereign, supranational and agency CP outstandings dropped by $2.80bn to $219.44bn. Corporate CP outstandings declined the most during the week by $5.56bn to $89.83bn. Meanwhile financial CP outstandings declined by $3.04bn to $503.37bn - SWIFT says that BTG Pactual, one of Latin America’s largest financial services firms, has joined the Know Your Customer (KYC) Registry, a centralised repository that maintains a standardised set of information about correspondent banks required for KYC compliance. For the KYC Registry, banks contribute an agreed ‘baseline' set of data and documentation for validation by SWIFT, which the contributors can then share with their counterparties. Each bank retains ownership of its own information, as well as control over which other institutions can view it - Laurel Powers-Freeling is to join the board of Atom, the UK’s newest bank, as its senior independent non-executive director. The appointment comes hot on the heels of Atom’s announcement that the Prudential Regulation Authority and the Financial Conduct Authority have approved its digital business model. Powers-Freeling was recently appointed as Chairman of Sumitomo-Mitsui Banking Corporation Europe - China has guaranteed that 100% foreign-owned firms (typically known as WFOEs – Wholly Foreign-Owned Entities) will be able to manufacture and market their own products for sale to mainland clients, operating under exactly the same rules as local private funds. The announcement comes at the end of the US-China Strategic and Economic Dialogue, which appears to have resulted in unprecedented rights for foreign firms participating in China’s financial markets. Greater access to China’s Interbank Bond (IBB) market has also been granted, with the elimination of firm-level ownership quotas in addition to improved access and operating rights for foreign banks. Finally, Shanghai’s Free Trade Zone (FTZ) has been specified as the testing ground where foreign owners can establish wholly-owned futures companies with access rights to domestic exchanges. China’s opening-up to foreign asset managers is now moving faster than our most optimistic predictions. With that speed in mind, we predict that all of the above opportunities will be available to foreign owners by the end of 2015.

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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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