Friday, April 2, 2010

Deutsche handles seamless client to clearer OTC interest rate swap

Original posted in the Financial Times by Jeremy Grant:

The development is believed to mark the first time an over-the-counter derivative of this kind has been handled in this way.

It comes as the financial crisis has prompted moves to reform the OTC derivatives markets, with regulators insisting on greater efficiency and transparency in the way such instruments are handled, from trading all the way through to the back-office function of clearing.

They want more OTC derivatives to be traded electronically – on exchanges or other electronic platforms – and processed through clearing houses to help reduce counterparty risk.

Some of the biggest users of interest rate swaps – such as Fannie Mae and Freddie Mac, the huge US mortgage lenders – are further driving the use of clearing in such OTC products after throwing their weight behind the process.

Deutsche Bank said it had executed and cleared the interest rate swaps through its Autobahn electronic trading platform and a new clearing system called dbClear.

In effect, a client of Deutsche was able with the click of a computer mouse to order an interest rate swap and see it processed all the way to the point of clearing – a process known as “straight through processing”. The same client also carried out a separate interest rate swaps trade through Tradeweb, an electronic swaps and bond trading platform, and then through to the dbClear system.

Previously the client would ask for a price from a dealer over the phone and the trade would be manually booked. Regulators want this automated to improve transparency and reduce the chance for errors.

The trade was cleared at SwapClear, the interest rate derivative clearing service operated by LCH.Clearnet, the London-based clearing house.

Deutsche’s move is also a sign that key players in the derivatives markets are starting to build new types of structures before regulators’ demands are even mandated by law. Congress in the US is still debating the scope of such reforms, while the European Parliament has yet to take up proposed reforms put forward by the European Commission.

Frederik Gentzel, global head of clearing and prime brokerage, said: “Even though legislation hasn’t been written yet, the industry is developing services naturally for the segments of the market where it make sense, in this case combining pre-trade transparency, electronic execution and clearing in one straight-through process.

“Electronic execution and clearing is going to be a big feature of the derivatives market,” Mr Gentzel said.

Separately, RBC Capital Markets, the corporate and investment banking arm of Royal Bank of Canada, said it had started clearing its interbank interest rate swap trades through SwapClear.

Jonathan Hunter, RBC’s global co-head of fixed income and currencies, said: “Streamlining our [rates] trades clearing process is a part of the evolution of our continued expansion plans”.

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