Tuesday 24th May 2016
News ticker: Monday, May 23rd: Morningstar has upgraded the Schroder Japan Growth investment trust to a Morningstar Analyst Rating™ of Gold. The investment trust previously held a Silver rating. Peter Brunt, senior manager research analyst at Morningstar, comments: “The fund previously held a Silver rating. We continue to hold fund manager Andrew Rose, the supporting team and the structured process in high regard. Our concerns over the use of gearing have decreased over time, and we no longer see a reason to hold this closed-end vehicle at a differentiated rating to the identically managed Schroder Tokyo OEIC. The fund is therefore upgraded to Gold.” - The SYRIZA/ANEL coalition government secured late yesterday parliamentary approval of a key multi-bill incorporating the legislation required for the implementation of the remaining prior actions attached to the 1st programme review - Turkey’s Halk Bank has partnered with: Intellect Design Arena Limited to automate their Debt Management processes. Intellect’s Debt Management System will enable the Bank to manage its collections and recoveries more effectively and efficiently. The global lending portfolio is expected to be $38trn by 2019, growing at an average of7.9% CAGR. With increasing loans and high expected levels of delinquency, there is an increasing emphasis on strong debt management processes to devise powerful strategies for timely collection. Banks are spending to acquire customers and retain them on the one side, and on the other, they are also spending on collecting owed debt - Following what the asset manager describes as steady growth in the assets of the Threadneedle UK Absolute Alpha Fund, Columbia Threadneedle says it is currently monitoring flows in the fund with the potential to apply further containment measures. The Threadneedle UK Absolute Alpha Fund is managed by Mark Westwood and Chris Kinder, the fund takes long and short positions to deliver an absolute return to clients. As of end April 2016 the fund was £988m, having grown from £373m a year ago. Gary Collins, head of Wholesale, EMEA, at Columbia Threadneedle Investments says. “Our priority is always to protect the interests of existing investors and we have ceased marketing activity and new client pitches over the past year to manage inflows into the Threadneedle UK Absolute Alpha Fund. We are now monitoring new flows with the potential to apply further measures to limit demand if necessary to ensure the investment integrity of the fund is retained.” - Moody's has today withdrawn the A3 issuer rating of BP Finance PLC, a wholly-owned subsidiary of BP plc (rated A2, positive outlook) for what it says are business reasons - Dragon Capital, says it will list its flagship fund, Vietnam Enterprise Investments Limited (VEIL), on the main market of the London Stock Exchange sometime in July this year. Launched in 1995, VEIL is the largest and longest-running fund focused on Vietnam with a Net Asset Value (NA) of approximately $850m. The London listing is expected to create a more transparent and liquid market in VEIL's shares, widening potential ownership, attracting greater analyst coverage, increasing VEIL's profile and narrowing the discount to NAV at which the shares currently trade. Approximately half of VEIL's NAV is represented by stocks which are at their foreign ownership limits and cannot otherwise be accessed by foreign investors. The move is timely: Vietnam’s GDP rose 6.7% last year – Guaranty Trust Bank plc (GTBank) says it has redeemed the outstanding portion of its $500m eurobond notes due on May 19th. The bank issued a cash tender offer back in February to repurchase all the outstanding eurobond notes (priced at 7.5%), which it says was well received by investors. The issue was the first involving a Nigerian issuer and was secured by its subsidiary GTB Finance, set against an irrevocable bank guarantee. A statement from the bank issued yesterday, an aggregate principal amount of $126,586,000 of the securities were successfully tendered. The outstanding was redeemed from the bank’s cash reserves – Elsewhere in Nigeria, the Federal High Court has ordered former Minister of Finance, Dr. Ngozi Okonjo-Iweala and the federal government to give account of how NGN30trn that accrued to government during the last four years of the former President Goodluck Jonathan's administration was managed.‎ Presiding judge, Justice Ibrahim Buba said in a statement that the former minister of finance and the government should have made the requested information available about the money or given reasons why it could not be obliged within the stipulated period in conformity with the Freedom of Information Act.‎ ‎The judgement was released in a formal statement by civil rights group, Socio-Economic Rights and Accountability Project (SERAP)‎ through the office of its deputy director, Olukayode Majekodunmi, saying it embarked on the suit, tagged: FHC/L/CS/196/2015, ‎following the allegations by the former governor of Central Bank of Nigeria (CBN), Charles Soludo, that at least NGN30trn "has either been stolen or unaccounted for, or grossly mismanaged over the last few years under the watch of Dr Ngozi Okonjo-Iweala. At the same time, local press report that ex-President Jonathan Goodluck may have gone into exile in the Cote d’Ivoire. It seems that the Economic and Financial Crimes Commission (EFCC) is about to arrest him to face corruption charges, which would signal a total turnaround for the president whose administration was based on tackling graft in the country - US monetary policy continues to exert its influence on markets. Trading volumes are thin anyway, but clearly there is a risk off sentiment running through and this won’t change until the next FOMC meeting decision; it might be that the market has now factored in a rise in June despite mixed data emanating from the US. Right now, there are more pressing worries about the outcome of the upcoming G7 meeting, with expectations that the group will fall apart over the application of monetary policy. The outcome of the Ise-Shima G7 summit on May 26th and 27th will weigh on markets for most of this week as the US talks increasingly stridently about the ‘threat’ of competitive currency devaluation. What is a central bank with a rising currency such as the yen and declining exports (down 10.1% in April on a year on year basis) meant to do? The other worrying trend is the increasingly racist and toxic tone of the Leave camp in the Brexit campaign. How many insults can be directed at ‘foreigners’ in the UK without someone calling for restraint? - Asian markets had a mixed day. That inverse relationship between the yen and the Japanese stock market was still writ large today. The Nikkei 225 closed down 81.75 points, or 0.49 percent, at 16,654.60, retracing earlier losses of more than 1.5%, while the dollar-yen pair ultimately retreated to 109.75/$1.00. The Kospi rose 0.39% but the Hang Seng lost 0.38% over the day. The Shanghai Composite rose 0.66% while the Shenzhen Composite did better, rising 1.45%, across the water the ASX200 was down 0.6%. The Straits Times Index (STI) ended 3.11 points or 0.11% higher to 2766.93, taking the year-to-date performance to -4.02%. The top active stocks today were DBS, which gained 0.53%, Global Logistic, which declined 1.64%, SingTel, which gained 0.78%, OCBC Bank, which gained 0.36% and UOB, with a0.56% advance. The FTSE ST Mid Cap Index declined 0.08%, while the FTSE ST Small Cap Index rose0.14% - Today, traders will be watching PMI data from France, Germany, and headline eurozone.

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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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