DTCC Trade Information Warehouse Completes Record Year Processing OTC Credit Derivatives

NEW YORK & LONDON--(BUSINESS WIRE)--The Depository Trust & Clearing Corporation’s (DTCC) Trade Information Warehouse, a global repository that records the details of OTC credit default swap trades, ended 2009 supporting the processing and recordkeeping of more than 2.2 million contracts, worth more than US$25.1 trillion (€17.5 trillion), helping to reduce risk in the market. In addition, the Warehouse managed 50 credit events with a gross value of US$386 billion, 129 successor events caused by restructurings, and processed 11 million gross payments amounts in nine currencies through its central settlement service.

“In addition, since the Warehouse is already well established infrastructure for maintaining transactions throughout their life, CCPs are able to connect and benefit from these services, and then themselves directly manage their primary functions such as risk management and credit intermediation.”

Once in the Warehouse, the trades can be fully serviced, including: automatic netting and calculation of all payments obligations as well as central settlement of these payments in multiple currencies; restructuring or other organizational changes; full or partial terminations of contracts; novation (the assignment of contracts to other trading firms prior to the contract’s end); and portfolio compression.

The total number of contracts in the Warehouse remained relatively flat year-over-year, despite fluctuations in the weekly activity trading volumes reported during the year. Industry-supported portfolio compression efforts helped reduce the gross notional value of the contracts in the Warehouse. Portfolio compression is a process that reduces the overall size and the number of line items in credit portfolios, without changing the risk parameters of the portfolio. At the end of 2008, the Warehouse held 2.2 million contracts with a gross notional value of about US$29.2 trillion (€21 trillion).

In 2009, DTCC also began tracking trades that were not recorded as official legal records in the Warehouse, working with the OTC derivatives community to meet their commitments to global regulators to increase regulatory transparency by reporting all trades to a single, central global repository per asset class. These are usually the more highly customized credit derivatives contracts, which until 2009 were not held in the Warehouse’s repository because of their specialized nature. When figures on these contracts were first publicly released in August 2009, there were 216,765 contracts worth an estimated $US5.7 trillion (€4 trillion). As of the end of 2009, the number of contracts recorded fell to 145,000, worth an estimated $4.7 trillion (€3.3 trillion). In part, this reduction was due to the loading of additional trades that could be held in the Warehouse as full legal records. Reductions were also made due to further processes to eliminate duplicate submissions, which increased the number of trades that were identified in August. These occurred when each counterparty to the trade submitted the same details and both submissions were counted as separate trades.

Record Breaking Processing

DTCC seamlessly processed a record-breaking 50 credit events during the year globally, including the General Motors bankruptcy in April, the largest in U.S. industrial history. This figure rose dramatically from the 10 credit events processed in 2008. The total gross value of those credit events in 2009 totaled US$386 billion (€270 billion), up from the US$285 billion (€205 billion) in gross value from 2008. Net settlement amount for credit events in 2009 was $17.7 billion (€12.4 billion), compared to about $12 billion (€8.6 billion) in 2008.

DTCC handled 129 “successor” events during the year. Successor events occur when a reorganization or restructuring causes changes in existing credit default swap contracts. Use of successor event processing allows contracts to be appropriately updated and reduces any confusion and risk about affected contracts.

In 2009, the Warehouse processed 10.9 million gross payments amounts, netted down to 557,000 bilateral nets, yielding a 95% netting ratio. By netting payments, the value of payments that need to be made are greatly reduced, thus reducing the financial stress on each participant firm and more importantly, reducing potential systemic risk to the entire market. In partnership with CLS Bank International, 7.3 million of these gross payments were netted and settled through the Warehouse’s central settlement service. The number of participants who signed up to the central settlement service increased to 34, compared with 14 participants in 2008. This was predominately due to the expansion of central settlement services to buy-side clients. As a result of this increase, as of December 2009, the industry achieved nearly 80% of all payments being settled through the central settlement service. Total gross payment obligations, whether processed by the Warehouse through CLS Bank or not, were $2.1 trillion, which netted down to $780 billion, down from $2.4 trillion gross and $1 trillion net respectively in 2008.

“This year’s activity clearly demonstrated the value of the Trade Information Warehouse as a single global repository both in providing needed transparency for the global OTC credit derivatives market to regulators and the general public, and in managing the necessary life cycle processing and settlement capabilities that bring greater safety and soundness to the market,” said Stewart Macbeth, DTCC managing director and head of the Trade Information Warehouse. “We supported settlement throughout the year seamlessly and without interruption, despite handling an average of one credit event a week all year.”

Working with CCPs

As part of its functions, DTCC’s Trade Information Warehouse also provided support to four clearing organizations in Europe and the U.S. that began offering central counterparty services to the industry in 2009 for OTC credit derivatives, namely ICE Trust, ICE Clear Europe, Eurex and LCH.Clearnet SA and are working with additional CCPs as they gear up to launch their services.

“Because virtually all of CDS contracts are already registered in a central location through the Warehouse’s global repository, CDS clearing organizations were able to connect to our trade data to begin clearing,” Macbeth said. “In addition, since the Warehouse is already well established infrastructure for maintaining transactions throughout their life, CCPs are able to connect and benefit from these services, and then themselves directly manage their primary functions such as risk management and credit intermediation.”

Building an OTC Equity Derivatives Trade Reporting Repository

Also in 2009, DTCC was selected by the industry, along with MarkitSERV, a DTCC joint company with Markit formed in 2009, to create a global trade repository for OTC equity derivatives. That selection was made in October following a request for proposal issued by the International Swaps and Derivatives Association (ISDA). Work on developing that repository is currently under way and is expected to be ready for testing and full operation in the second quarter.

“The industry has made commitments to regulators to have equity derivatives trades in a trade repository no later than July 2010,” Macbeth noted. “Our task is to create a trade reporting repository that will help increase transparency for this market segment.”

About DTCC

The Depository Trust & Clearing Corporation (DTCC), through its subsidiaries, provides clearance, settlement and information services for equities, corporate and municipal bonds, government and mortgage-backed securities, money market instruments and over-the-counter derivatives. In addition, DTCC is a leading processor of mutual funds and insurance transactions, linking funds and carriers with financial firms and third parties that market these products. DTCC’s depository provides custody and asset servicing for more than 3.5 million securities issues from the United States and 121 other countries and territories, valued at US$33.9 trillion. In 2009, DTCC settled more than US$1.47 quadrillion in securities transactions. DTCC has operating facilities and data centers in multiple locations in the United States and overseas. For more information on DTCC, visit www.dtcc.com.