Saturday 20th December 2014
NEWS TICKER: FRIDAY DECEMBER 19TH 2014: Scotiabank’s Commodity Price Index dropped -4.8% m/m in November (-6.1% yr/yr) and will end 2014 in a ‘deflationary’ mode, says economist Patricia Mohr. "Significant capacity expansion and the defence of market share by major oil and iron ore producers— against a backdrop of lacklustre world economic growth — account for the softness at the end of the year," she says. Mohr adds that the decision by Saudi Arabia not to reduce output to shore up international oil prices, but instead to allow prices to drop to levels curbing US shale development appears to be having a negative impact on confidence in a wide variety of other commodity as well as equity markets. She predicts prices will fall further this month, but will start to rebound in mid 201 - Jonathan Hill, the EU's financial-services commissioner, says he plans to pursue rules that separate a bank's proprietary trading from retail operations. "The sensible thing to do is to seek to make progress quickly" on the issue, Hill said. "There are still areas of risk in some of the biggest and most complicated banks,” reports Bloomberg- CME Group, said yesterday that it will change daily price limits in its CME Feeder Cattle futures effective today, pursuant to its emergency action authority. The current daily price limit for CME Feeder Cattle futures is $3.00 per hundredweight and will change to $4.50 per hundredweight effective on trade date December 18th Additionally, effective December 19th (tomorrow) these limits will have the ability to expand by 150% to $6.75 per hundredweight on any business day in the event that one of the first two contract months settles at limit on the previous trading day. CME Feeder Cattle futures have been locked limit for five consecutive days as a result of various factors. The change to daily price limits is necessary to ensure continued price discovery and risk transfer, says the CME. Daily price limits for CME Live Cattle futures will remain unchanged at $3.00 per hundredweight. Effective Friday, December 19th, these limits will have the ability to expand by 150 percent to $4.50 per hundredweight in the event that one of the first two contract months settles at limit on the previous trading day - The Straits Times Index (STI) ended +16.42 points higher or +0.51% to 3243.65, taking the year-to-date performance to +2.49%. The FTSE ST Mid Cap Index gained +0.29% while the FTSE ST Small Cap Index gained +0.71%. The top active stocks were Keppel Corp (+2.68%), SingTel (-1.02%), DBS (+2.36%), Global Logistic (-3.21%) and UOB (+0.30%). The outperforming sectors today were represented by the FTSE ST Basic Materials Index (+3.13%). The two biggest stocks of the FTSE ST Basic Materials Index are Midas Holdings (+6.38%) and Geo Energy Resources (unchanged). The underperforming sector was the FTSE ST Telecommunications Index, which declined -0.98% with SingTel’s share price declining -1.02% and StarHub’s share price declining-0.73%. The three most active Exchange Traded Funds (ETFs) by value today were the IS MSCI India (+2.56%), DBXT CSI300 ETF (+0.42%), STI ETF (+0.61%). The three most active Real Estate Investment Trusts (REITs) by value were Ascendas REIT (-0.42%), Keppel DC REIT (unchanged), Suntec REIT (+0.26%). The most active index warrants by value today were HSI23400MBeCW150129 (+7.32%), HSI22600MBePW150129 (unchanged), HSI24000MBeCW150129 (+12.50%). The most active stock warrants by value today were KepCorp MBeCW150602 (+21.95%), DBS MB eCW150420 (+29.29%), DBS MB ePW150402 (-18.03%) - Spain’s Director of Public Prosecutions, Eduardo Torres Dulce, has resigned from the post for “personal reasons”, Spanish daily El Mundo reported this morning. A spokesman for the Public Prosecutor’s office confirmed the news by telephone to The Spain Report, saying that Mr. Torres Dulce had informed Justice Minister Rafael Catalá of his decision: “but that it perhaps would not come into effect until they find a replacement”. That decision is taken at cabinet level. The next cabinet meeting for Rajoy’s government is tomorrow morning - Hedge funds including Marshall Wace, Odey Asset Management and Lansdowne Partners are shorting OTP Bank Plc, a Hungarian lender with a Russian subsidiary whose shares have fallen almost 6% this month reports Albourne Village. All three London-based funds took or increased their position this month in OTP, Hungary’s largest lender, according to data compiled by Bloomberg. The ruble rose today in Moscow after plunging as much as 19%against the dollar yesterday, when Russia’s central bank increased interest rates to 17% percent from 10.5 percent in an attempt to stem the decline. The ruble is down 52% this year and has taken a disproportionate beating in the wake of sanctions and falling oil prices. The country still has the third largest currency reserves in the world and so is unlikely to default. According to Eric Chaney, Manolis Davradakis and Greg Venizelos from AXA IM’s Research and Investment Strategy team Russia will likely resort to fiscal stimulus to contain the risk of social and political unrest. Capital controls, political unrest and even default on private hard currency debts are possible outcomes they say. They credit default swaps market is pricing a one-third probability of sovereign default within five years - Indonesia is ramping up financing for its $439bn development program, planning an almost fivefold increase in sales of project sukuk. The government is seeking to raise IDR7.14trn rupiah (around $568m) from notes that will fund particular construction ventures next year, compared with IDR1.5trn this year, which say local press reports, will help finance its estimated spending of about IDR5,519trn from 2015 to 2019 to build roads, railways and power plants.

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.
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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