Buy Side Copes With OTC Clearing

Terry Flanagan

The advent of mandatory clearing of most OTC derivatives transactions entails many new procedures for buy side firms revolving around collateral optimization, establishing connectivity to FCMs and clearinghouses, and regulatory compliance.

Markit has reported that more than 600,000 trades have been submitted to clearinghouses by MarkitSERV in the period between March 11, when the Commodity Futures Trading Commission made clearing of certain over-the-counter (OTC) derivatives mandatory, and the end of July. MarkitSERV is the most widely-used trade processing service for OTC derivatives.

“The CFTC’s Category 2 deadline affected a large number of firms and the industry has accomplished a lot in a short time,” said Henry Hunter, managing director and head of product management at MarkitSERV. “Firms need a seamless trade management process for the front, middle and back office, so they can meet obligations to clear trades moments after they execute. MarkitSERV gives customers a practical cross-asset class solution that helps them process, clear and report OTC derivative transactions.”

Henry Hunter, MarkitSERV

Henry Hunter, MarkitSERV

In the first half of 2013, the volume of trades submitted for clearing using MarkitSERV was up 48% from the same period in 2012, and included more than 120,000 “client” trades – transactions in which at least one party is not a member of a clearinghouse – on behalf of approximately 280 firms.

More than 300 buy-side firms became new subscribers of MarkitSERV’s clearing connectivity so far this year in order to comply with CFTC mandates and to gain an efficient solution for clearing derivatives in multiple asset classes at multiple clearinghouses.

MarkitSERV connected to its first clearinghouse in 2004, and since then, more than 5 million OTC derivatives trades have been submitted for clearing using MarkitSERV. Today, the service links more than 2,500 buy-side firms, 100 dealers and 70 execution venues to 13 clearinghouses worldwide. MarkitSERV’s newest clearing connection is to LCH.Clearnet LLC (SwapClear US), which launched in June.

Separately, a team of sales, trading, risk management and technology experts formerly with Wells Fargo have launched Derivative Path, a financial services company that is approaching the over-the-counter derivative markets with a technology-driven services offering that will assist financial institutions and commercial end users in executing and managing their over-the-counter interest rate derivative transactions.

“In an increasingly complex regulatory environment, financial institutions and their commercial end users are finding it more cumbersome to execute straightforward, risk-mitigating interest rate swaps and other derivatives,” said Steve Hawk, co-founder and co-CEO at Derivative Path. “We are making available a cost-effective, outsourced solution to help these institutions continue offering such products and remain compliant with the increased regulatory demands placed on the industry.”

The sales and trading team has led derivative sales and execution efforts for several major banks, has worked with respective capital markets and lending teams and with numerous financial institutions in creating derivatives back-to-back hedging programs.

“We are fully committed to applying our collective experience in running successful derivative businesses and accessing other industry experts and resources as needed, to ensure our clients achieve their desired financial risk management program goals,” said Pradeep Bhatia, co-founder and co-CEO.

Derivative Path will offer a full suite of services in hedge structuring, trade execution, required Dodd-Frank regulatory reporting and record retention, as well as risk management, operational, legal and accounting support. The team will also offer assistance to clients in setting up hedging, credit and other related bank policies, as well as with banker training.

Over the coming months, the company plans to launch a secure, technology platform capable of assisting its financial institution clients in tracking the client-hedging process from proposal to execution to ongoing trade lifecycle servicing.

“Our technology team has years of experience building and running large scale derivatives trading systems,” said John Fleming, Derivative Path’s chief technology officer. “We are using this expertise to create a client-accessible, state of the art technology platform which will greatly enhance our clients’ derivative workflow experience.”

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