Friday 29th July 2016
NEWS TICKER: JULY 28TH 2016: The Prysmian Group's first-half results are marked by revenue growth and a significant improvement in profitability. Explains CEO Valerio Battista. "The biggest drivers of growth have been Energy Projects and Telecom. The important set of technological innovations introduced between end of 2015 and 2016, involving the launch of the 600kV and 700kV cable systems, combined with greater project execution capabilities, involving the commissioning of Ulisse, the Group's third cable vessel, mean the Group is well positioned to continue taking advantage of the opportunities offered by the market. In the Telecom business, growth has been driven by the recovery in optical fibre competitiveness and the new optical cable manufacturing capacity in Eastern Europe. Performance by the higher value-added businesses has contributed to a fresh upturn in profitability, with a significant improvement in margins, also thanks to our actions to reduce fixed costs and rationalise manufacturing footprint. The newly acquired Oman Cables Industry has also made an important contribution in this regard." – The Samsung Electronics board has decided to make additional investments in Samsung Venture Investment Corporation's, an affiliated company of Samsung Electronics, New Technology Investment Funds. SVIC plans to establish a new venture fund, SVIC 32. SVIC 32 is a cooperative fund with its investment focus on the latest technologies to enhance competitiveness of existing set businesses and identify future growth businesses. The transaction is expected occur during the third quarter of 2016. The transaction size is KRW 198bn (99% of the total fund: KRW200bn) -- As a slug of generally positive data emerges from the UK this week, and commenting on today’s corporate results, Richard Marwood, senior fund manager at Royal London Asset Management, says, “Today’s flurry of corporate earnings suggests that as yet the outcome of the EU referendum has not had a major impact on many UK listed companies, outside of the movements in currencies. Without a clear financial picture of the impact, many CEOs are at pains to highlight the resilience of their business and their willingness to take strong action if required. I would expect the bid for ARM to herald a period of heightened corporate activity. The increased offer for Premier Farnell is another clear example of overseas bidders taking advantage of a depressed pound to snap up UK assets.” -- Singapore Exchange (SGX) today welcomed EC World REIT to Mainboard under the stock code “BWCU”. EC World REIT is the first Chinese specialised logistics and e-commerce logistics REIT to be listed on SGX. With an initial geographical focus on the People’s Republic of China (PRC), the REIT invests in a diversified portfolio of income-producing real estate primarily used for e-commerce, supply-chain management and logistics purposes. Peter Lai Hock Meng, Chief Executive Officer of EC World Asset Management Pte. Ltd., the Manager of EC World REIT, said, “We are pleased to celebrate EC World REIT’s successful listing and trading today and we would like to extend our sincere appreciation to all investors for making this milestone possible. Our IPO portfolio of six quality properties offers investors unique exposure to the logistics and e-commerce sectors in Hangzhou - one of the largest e-commerce hubs in China.” – Emerging markets assets benefitted in the Asian session today as the dollar retreated following the US Fed’s decision yesterday to do nothing. Yields on US government bonds declined slightly in the hours following the release of the monetary policy statement. The fall on the long end was with 6 basis points and was more pronounced than the drop on the short end of 3 basis points (bps). The dollar lost 3/4 of a cent vs the euro and stood this morning at 1.107 EUR/USD. The Federal Reserve stopped short of signalling a near-term increase in US interest rates, and while a December move is seen as likely, markets are focusing instead on the extra stimulus Japan's government is expected to deliver tomorrow. A subsequent retreat in the retreat boosted emerging assets in the Asian session with stocks at new 11-month highs despite fresh wobbles on Chinese equity markets. The Straits Times Index meantime (STI) ended 23.88 points or 0.81% lower to 2917.61, taking the year-to-date performance to +1.21%. The top active stocks today were DBS, which declined 2.34%, Singtel, which declined 0.46%, UOB, which declined 1.27%, OCBC Bank, which declined 0.57% and Wilmar Intl, with a close unchanged. The FTSE ST Mid Cap Index gained 0.04%, while the FTSE ST Small Cap Index declined 0.88%. MSCI's emerging equity index rose 0.25% despite pullbacks in Asian markets, where some concern is rising over volatility in China and the weakening yen. Elsewhere in Asia, Chinese shares fell as much as 3% at one point before recovering as new regulations are expected to prompt wealth managers at small banks to bail out of stocks and into bonds. Elsewhere, the Turkish lira continues to recover, firming to one-week highs. In emerging Europe, Turkish assets continued their post-coup recovery, shrugging off a worsening crackdown on alleged plotters. Stocks jumped 1 percent to one-week highs while the lira was flat, also near one-week highs. Turkey's economic confidence index hit also touched its highest level so far this year in July, rising 14.9% to 95.7. In Africa meantime, the temperature is different. the Nigerian naira hit new record lows against the dollar on Wednesday, shrugging off a rate increase of 200 basis points (bps). Traders are also waiting to see if Egypt will announce plans to devalue its pound at a central bank meeting. Cairo stocks pulled off three-month highs hit after news the government was in loan talks with the International Monetary Fund. The government’s 2025 dollar bond, which rose 4% after the news, eased half a percent. Poland too is in the spotlight today as the European Commission's statement yesterday gave Warsaw three months to address rule of law concerns. In early trading today Polish stocks extended losses, falling 0.7% and the zloty lost 0.2.%.

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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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