Wednesday, July 28, 2010

Realpoint advocates point-in-time ratings

Realpoint, a subsidiary of Morningstar, has been in the media recently discussing the use of point-in-time ratings in response to Nationally Registered Statistical Rating Organizations (NRSROs) provisions in the recently passed Dodd-Frank Act. The bill makes NRSROs liable for the quality of their calls when they are used for public sale documents. One strategy that could reduce the firm's liability is the point-in-time ratings model, Realpoint's attorneys and investors said. The agency believes sticking to ratings that refer to a specific point in time, as opposed to grading a share class on how it may do in the future, may limit exposure to liability.

From the Realpoint website:

Realpoint is a nationally recognized credit-rating agency that has earned a reputation for innovation and excellence in the structured finance market. Our goal is to increase market transparency and provide investors with the highest quality ratings and analysis by offering a wide array of securities research, surveillance services, data, and technology solutions. More than 225 institutional investment firms trust Realpoint to help them identify credit risk in structured finance investments.

Tuesday, July 27, 2010

Goldman Sachs Announces Clearing Services for OTC Derivatives

New Derivatives Clearing Services (DCS) business to provide suite of integrated agency clearing services for all listed and OTC derivatives

Goldman Sachs announced today the launch of its Derivatives Clearing Services (DCS) business. DCS provides clients with a comprehensive global OTC clearing service for interest rates, credit, foreign exchange, equities and commodities.

“The DCS offering provides our clients with a host of value-added services and multi-product expertise to successfully navigate this dynamically changing environment.”

Goldman Sachs DCS is an agency business designed to streamline the client derivatives clearing experience across products, asset classes and regions. DCS builds upon the firm’s globally recognized prime brokerage and futures clearing platforms to maximize efficiency and provide an integrated suite of tools and reporting for clients.

“In partnership with our clients, regulators and multiple clearing venues, we are committed to improving market structure for derivatives,” said Michael Dawley, Managing Director and Co-Head of Futures and DCS, Goldman Sachs. “The DCS offering provides our clients with a host of value-added services and multi-product expertise to successfully navigate this dynamically changing environment.”

Goldman Sachs recognizes that clients will be faced with new reporting, connectivity, and regulatory requirements. The firm is committed to investing in innovative solutions to help clients address these changes.

“The move to central clearing for OTC derivatives is a significant turning point in the marketplace," said Jack McCabe, Managing Director and Co-Head of Futures and DCS at Goldman Sachs. “Our strong trading franchise, coupled with our market leading futures and prime brokerage services, enables us to provide our clients with the foundation they need to adapt to these important industry developments."

The Goldman Sachs Group, Inc. is a leading global investment banking, securities and investment management firm that provides a wide range of financial services to a substantial and diversified client base that includes corporations, financial institutions, governments and high-net-worth individuals. Founded in 1869, the firm is headquartered in New York and maintains offices in London, Frankfurt, Tokyo, Hong Kong and other major financial centers around the world.

Monday, July 26, 2010

Adverse Selection in Mortgage Securization

By Sumit Agarwal, Yan Chang and Abdullah Yavas

Abstract: We investigate lenders’ choice of loans to securitize and whether the loans they sell into the secondary mortgage market are riskier than the loans they retain in their portfolios. Using a large dataset of mortgage loans originated between 2004 and 2008, we find that banks sold low-default risk loans into the secondary market while keeping higher-default risk loans in their portfolios. This result holds for both subprime and prime loans. We do find strong support for adverse selection with respect to prepayment risk; securitized loans had higher prepayment risk than portfolio loans. It appears that in return for selling loans with lower default risk, lenders retain loans with lower prepayment risk. Small lenders place more emphasis than large lenders on default risk versus prepayment risk of the loans they retain. Securitization strategies of lenders changed during the sample period as they became less willing to retain higher-default loans after the housing market reached its peak. There are also differences in the performance of loans sold to GSEs and loans sold to private issuers. Loans sold to private issuers have lower prepayment rates in each year while relative default rates vary across the years.

Download here:

Thursday, July 22, 2010

DTCC Further Expands Public Release of Credit Default Swap Data Registered in its Global Trade Repository (DTCC Press Release)

The Depository Trust & Clearing Corporation (DTCC) today further expanded its public release of credit default swap (CDS) data, providing more detailed market segmentation information on the largest corporate and sovereign CDS (single named reference entities) registered in its Trade Information Warehouse's (Warehouse) global repository. This extension of the data posted on DTCC's website ( will enable the public to assess key characteristics of these CDS contracts more efficiently and is another step in DTCC's on-going efforts to bring greater transparency into the over-the-counter (OTC) derivatives market.

Starting today, DTCC is including specific additional information to that already shown in tables 6 and 14 for the top 1000 single reference entities posted on its website. This new information will cover the type of market (e.g., corporate, government), sector (e.g., financial services, sovereign) and the ISDA (International Swaps and Derivatives Association) Determinations Committee Region (e.g., Americas, Europe, Japan, Asia Ex-Japan, and Australia NZ) for each single named reference entity.

DTCC will also be posting a new table showing traded activity on a weekly basis initially for the top 1000 single-named reference entities. Being published in a new Section 4, this table is an extension of a report released last June and can be used to understand contract liquidity better. Similar to the data issued in June, the table will show traded activity levels and exclude certain contractual booking events (e.g. rebooking for clearing, and portfolio compression) which are not representative of price-making activity. Further enhancements will continue to be made to enrich the data for asset types, such as indices and tranches.

"We have seen considerable interest among market observers in getting a better view on the types of contracts and sectors that make up the largest portions of the CDS market, and see continued interest in volume levels," said Stewart Macbeth, general manager, DTCC Trade Information Warehouse. "Adding these specific classifications to the gross and net notional values and number of CDS contracts already published for these single reference entities will enhance the ability of the market to assess these contracts as part of a sector group or region. Providing additional traded volume information will build on the one-off report published in June, originally designed to give regulators more liquidity information, as they look at clearing."

Unfettered access to global regulators

Upon request, DTCC also provides global regulators with specific counterparty information needed to fulfill their regulatory mission. DTCC currently provides regular reporting to more than 30 regulators across the globe, including the Federal Reserve Bank, the Securities and Exchange Commission (SEC), the Commodities & Futures Trading Commission (CFTC), the European Central Bank, Banque De France, the U.K. Financial Services Authority (FSA), Bank of Japan and the Hong Kong Securities and Futures Commission.

It is one of DTCC's bedrock principles that all interested regulators should have unfettered access to Warehouse information to help further their respective regulatory missions. DTCC has also called for comparable access to data for regulators interested in specific trading patterns regardless of location. The standards for release of CDS data maintained in the US to non-US regulators would be the same as those for release to US regulators.

Since launching the Warehouse in 2006, DTCC has worked closely with market participants and in consultation with regulators across the globe to build a robust central repository that provides an accurate snapshot of the CDS market from a central vantage point. DTCC has also been collaborating with the OTC Derivatives Regulatory Forum, which is made up of more than 40 international financial regulators, to meet their objective of fostering a global framework for the sharing of data requested by regulators from the Warehouse. The Forum recently provided DTTC with new guidelines on the sharing of CDS data from its global CDS trade repository, helping bring greater clarity and building consensus on the process for responding to regulatory requests.

Earlier this month DTCC announced its plans to establish a new European subsidiary, DTCC Derivatives Repository Ltd., which will maintain global CDS identical to that maintained in its New York-based Trade Information Warehouse. Headquartered in London under a regulatory application filed with the Financial Services Authority (FSA), the new subsidiary is intended to help ensure that regulators globally have secure and unfettered access to global CDS data on (CDS) by establishing identical data sets on two different continents.

DTCC Derivatives Repository Ltd. will jointly house the global equity derivatives repository being built by DTCC as the result of winning the International Swaps and Derivatives Association (ISDA®) global bid for this service. The location of this European subsidiary was made based on the ISDA mandate to have the global equity derivatives repository in London.

About the Warehouse

The Warehouse is the only comprehensive global repository for the OTC credit derivatives market. DTCC uses it to gather and store information on OTC credit derivatives and perform critical post-trade processing functions such as automated calculation, netting and central settlement of payment obligations, as well as settlement of credit events such as bankruptcies. It is operated through DTCC's Warehouse Trust Company LLC subsidiary, which is regulated by the New York State Banking Department and a member of the Federal Reserve System. Its customer base includes all major dealers and more than 1800 buy-side firms and market participants in more than 50 countries.

The Warehouse publishes current and historical data on CDS trades. The data population includes all electronically confirmed contracts for both cleared and uncleared transactions. Currently, there are four active central counterparties (CCPs) utilizing the Warehouse services. While the Warehouse also has basic, non-legal records of highly customized trades ("copper records"), that data is not included in its weekly updates. These "copper" records, comprising more bespoke contract submissions not confirmable on an automated electronic platform, represent less than 6% of total contract volume held in the repository.

The total gross notional value of the nearly 2.3 million legally confirmed CDS contracts held in DTCC's Warehouse as of July 16 was approximately US$24.9 trillion.

DTCC updates its website weekly on Tuesdays, after 5:00 p.m. ET (2200 GMT).

Wednesday, July 21, 2010

Davis-Polk Guidance on Use of Credit Ratings in Securities Offerings Following Dodd-Frank

Among the many provisions contained in The Dodd-Frank Wall Street Reform and Consumer Protection Act (signed into law by the President today), is a provision which nullifies Rule 436(g) under the Securities Act beginning tomorrow . Under Rule 436, if information is included in a registration statement that is prepared or certified by an expert, that expert’s consent must be obtained. Rule 436(g) had provided an exemption for credit ratings provided by nationally recognized statistical rating organizations (or “NRSROs”) such that consent was not required even if a rating was included in the registration statement.

Many corporate issuers refer to the ratings of their outstanding debt and preferred securities in the prospectus and prospectus supplements for those securities as well as in their Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q that are incorporated into their registration statements. The repeal of Rule 436(g) therefore raises certain questions regarding the continued use of ratings information given that certain rating agencies have already indicated that they are currently unwilling to consent and others are expected to take a similar position.

Please click here for a White Paper, prepared by Davis Polk along with several other law firms, after consultation with staff members of the SEC Division of Corporation Finance, which sets forth approaches that we believe are appropriate with respect to the use of NRSRO ratings in offerings of securities.[1]

[1] This white paper does not address asset-backed securities offerings governed by Regulation AB, as Regulation AB requires inclusion of ratings information.

CESR Consultation on Transaction Reporting on OTC Derivatives

This consultation paper sets out CESR’s proposal for the possible organisation of transaction reporting on OTC derivatives as well as for the extension of the scope of transaction reporting obligations.

CESR’s proposal on transaction reporting on OTC derivatives is based on the assumption that all persons not exempted from European Market Infrastructure Legislation (including MiFID-authorised firms) would have to report their OTC derivatives transactions to trade repositories (TRs) after these will have been established and registered under EMIL.

However, CESR proposes that investment firms would retain the possibility of complying with their transaction reporting obligations with respect to OTC derivatives under MiFID provisions. Investment firms reporting their transactions to a TR, supporting MiFID standards, would be exempted from direct reporting when they communicate to the competent authority their decision to report their transactions through a TR. The MiFID regime would therefore apply to reporting obligations but these could be dealt with by TRs for the account of investment firms in order to avoid duplication. In other words, TRs would be recognised as a valid third-party reporting mechanism under Article 25(5) of MiFID.

As long as EMIL has not been finalised and implemented, OTC derivatives transactions would be reported under MiFID rules, where applicable.

Furthermore, CESR is considering to propose to the European Commission to extend, through a change in Article 25 of MiFID, the scope of transaction reporting obligations to financial instruments that are admitted to trading only on MTFs and to OTC derivatives.

Download the paper here:

CESR Consultation on Standardisation and exchange trading of OTC derivatives

Following the financial market turmoil which began in 2007, a number of regulatory initiatives have been launched to address the problems identified in Europe and the United States in relation to the derivatives traded over-the-counter (OTC). In this regard, the Commission’s communication “Ensuring efficient, safe and sound derivatives markets: Future policy actions” [COM (2009) 332 final] states – among others - that consideration should be given to ensuring that trades eligible for exchange trading take place on organised trading venues as defined by MiFID.

In the U.S., legislative initiatives have been launched in the House of Representatives and the Senate following the Administration’s initiative to strengthen OTC derivative markets through improving risk management and increasing transparency. In this paper CESR explores the need for taking regulatory actions in relation to further standardisation for credit, equity, interest rate, commodity and foreign exchange derivatives both as a means in itself and also in relation to the promotion of trading of these derivatives on organised markets.

This paper does not analyse issues related to post-trading and in particular eligibility for clearing. In relation to standardisation, CESR is of the opinion that firms should be able to retain the flexibility to customise aspects such as standard valuation, payment structures and payment dates given the role that OTC derivatives, and in particular bespoke products, play in meeting hedging needs.

Nevertheless, CESR is of the view that greater standardisation of OTC derivatives contracts can deliver efficiency benefits to the market. In particular, CESR has identified the use of electronic confirmation systems as one measure which could potentially deliver benefits to the market. To date, much of this work has been industry-driven but the question now faced by regulators is whether current progress is sufficient, how best to build on current industry initiatives, and whether regulatory intervention is needed.

As a consequence, CESR is eager to explore with the industry what measures could be taken to foster a higher degree of standardisation. As the degree of standardisation differs by asset class, CESR is keen to solicit views on whether regulators should prioritise their focus on a) a certain element of standardisation and/or b) a particular asset class. CESR particularly invites market participants to provide information on the potential costs of introducing a mandatory electronic trade confirmation requirement for European trading of OTC derivatives so that CESR can take an informed decision when making its final recommendations to the European Commission.

In relation to ‘exchange trading’ of derivatives currently traded OTC, CESR believes that trading on organised markets could deliver a number of benefits like providing a higher level of transparency, enhancing liquidity, ensuring efficiency and risk reduction and providing an easy access for market participants. There are however also a number of limitations or pre-requisites to exchange trading of derivatives that may explain why the OTC segment of the market remains very large: the need for the contracts to be standardised, the inability to customise contracts according to individual customers’ needs and the limited possibility for products innovation.

As a preliminary opinion, CESR is in favour of incentivising the use of organised trading venues but continues to consider whether mandatory usage is desirable, taking into account the discussions currently taking place on this issue in other jurisdictions and international fora. Therefore, CESR would like to further explore with market participants which kind of incentives could effectively promote exchange trading.

CESR invites responses to this consultation paper by 16 August 2010. All contributions should be submitted online via CESR’s website under the heading ‘Consultations’. All contributions received will be published following the close of the consultation, unless the respondent requests its submission to be confidential.

Download the paper:

Monday, July 19, 2010

Record OTC IRS volumes for LCH.Clearnet's SwapClear (Press Release)

A record number of over-the-counter (OTC) interest rate swap (IRS) trades were cleared in Q2 2010 by LCH.Clearnet Limited’s (LCH.Clearnet) market leading IRS clearing service, SwapClear. The total number of trades for the quarter reached 191,694 trade sides, a 30% increase on Q2 2009, driven by record volumes in May of 73,440 trade sides. The increased figures bring the total outstanding amount of IRS transactions to USD224.6 trillion.

Established over ten years ago, SwapClear’s membership has increased significantly to 32 direct members and the product scope has grown to cover the world’s 14 largest currencies with tenors up to 50 years in USD, EUR and GBP. The only truly global clearing service for IRS, SwapClear now clears over 40% of the market.

Joe Reilly, director, SwapClear said: "SwapClear was developed to provide a global solution for the IRS market. For ten years now it has delivered a secure, reliable and efficient environment for processing trades. The growing demand for the service and these impressive volumes demonstrate just how effective the SwapClear clearing model is.”

The resilience of SwapClear’s default management process was demonstrated in September 2008 when it successfully handled Lehman Brothers’ USD9 trillion interest rate swap default. The highly effective default management process ensured that over 60,000 trades were hedged and auctioned off to other clearing members in a timely fashion and that the default was managed well within Lehman Brothers’ margin held and with no recourse to the default fund.

LCH.Clearnet is both a Financial Services Authority (FSA) Recognised Clearing House and a Commodity Futures Trading Commission (CFTC) registered Derivatives Clearing Organization (DCO).

Friday, July 9, 2010

Mutual Fund Fee-Backed Securitization Under Regulatory Fire

NEW YORK (Standard & Poor's) July 6, 2010--Standard & Poor's Ratings Services
is monitoring regulatory discussions surrounding the guidelines that govern
how mutual funds charge 12b-1 fees to investors. 12b-1 fees are deferred fees
charged by mutual funds to cover certain administrative, marketing, and sales
expenses. The SEC has stepped up its discussions on the topic lately, and
possible reforms could have an impact on the ratings Standard & Poor's assigns
to securitized 12b-1 fee trusts.

Tranches in 12b-1 fee trusts generally cannot achieve ratings at the 'AAA'
level under Standard & Poor's current criteria due to the risks we believe are
posed by potential changes in the regulatory framework for mutual funds.
Periodic regulatory discussions over the past several years have reinforced
these considerations. Most recently, SEC chairman Mary Shapiro commented "We
need to critically rethink how 12b-1 fees are used and whether they remain
appropriate," as reported in the July 6, 2010, issue of The Wall Street

It's currently uncertain whether regulatory change will occur and in what
form. Therefore, the potential effect of any such regulatory change on the
outstanding ratings is unknown.

The outstanding rated 12b-1 fee trusts are backed by fees on static pools of
mutual fund shares. The performance of the trusts does not depend on the
issuance of new shares under the 12b-1 regulation. Therefore, unless
regulation alters fees paid by outstanding shares, it's unlikely that the
transactions, or their current ratings, would be affected solely as a result
of the regulation. Additionally, these transactions typically mature after
eight years, as that is the maximum period mutual funds can collect 12b-1
fees. Depending on the timing of any possible new regulations, the outstanding
transactions may have time to repay their notes before regulatory changes take

Standard & Poor's will continue to monitor developments in this area. As more
information about regulatory changes becomes known, we will take appropriate
rating actions as they are warranted. We will also continue to monitor the
performance of this asset class and provide market updates as needed.

Related Criteria And Research:

"Mutual Fund Fee Securitizations And Underlying Fund Net Asset Values."

"Rating Mutual Fund Fee-Backed Securities"

Thursday, July 1, 2010

DTCC to Establish European-Based Trade Reporting Repository

London, 1 July 2010 – The Depository Trust & Clearing Corporation (DTCC) announced today plans to establish a new subsidiary called DTCC Derivatives Repository Ltd., which will maintain global credit default swap data identical to that maintained in its New York based Trade Information Warehouse.

This move is intended to help ensure that regulators globally have secure and unfettered access to global data on credit default swaps (CDS) by establishing identical CDS data sets on two different continents.

“DTCC has always envisaged a ‘global solution’ for repository services supporting each OTC asset class,” said Stewart Macbeth, Managing Director and General Manager, Trade Information Warehouse. “It is very common for counterparties to be located on different continents and to trade on underlying securities issued across borders. This means that repositories for any asset class need to maintain global information to be useful. It also means that steps need to be taken to ensure that the data is always available to regulators globally regardless of events and circumstances taking place in one location or another.”

DTCC Derivatives Repository Ltd will be headquartered in London under a regulatory application filed with the Financial Services Authority (FSA) in the UK.

This new subsidiary will jointly house the global equity derivatives repository being built by DTCC as the result of winning the International Swaps and Derivatives Association (ISDA®) global bid for this service. The location of this European subsidiary was made based on the ISDA mandate to have the global equity derivatives repository in London.

This European-based repository will support a wide variety of critical functions, including operational, customer, technical, and most importantly, CDS trade reporting needed to ensure greater public transparency and to support the information needs of regulators and supervisory authorities.

DTCC’s current customer base in the credit derivatives market includes all major derivatives dealers and more than 1,700 buy-side firms and other market participants located in more than 50 countries and supporting reference entities in 90 countries. The total gross notional value of the approximately 2.3 million CDS contracts held by DTCC is $25.1 trillion.

ISDA Publishes Best Practices for the OTC Derivatives Collateral Process

NEW YORK, Wednesday, June 30, 2010 – The International Swaps and Derivatives Association, Inc. (ISDA) today published Best Practices for the OTC Derivatives Collateral Process ("Best Practices"). The Best Practices are the result of the collaborative efforts of a working group of buy-side and sell-side market participants, under the auspices of the ISDA Collateral Steering Committee. The detailed document, which will be updated by the Collateral Steering Committee on a periodic basis, provides guidance on current best practices for the collateral management process.

“ISDA continues to harmonize practices between market participants in an effort to mitigate risks, set expectations and establish further market standards,” said Julian Day, Head of Trading Infrastructure, ISDA. “The Best Practices for Collateral are the latest in a series of industry efforts by collateral professionals to enhance the collateral management practice.”

The Best Practices focuses on OTC derivative trades collateralized on a bi-lateral basis under the ISDA English and New York law Credit Support Annexes (CSAs) and English Law Credit Support Deed (CSD) agreed between two parties.

The pro-active focus on industry improvement is based on continuing industry engagement and collaboration to establish a set of best of breed practices. Since the publication of the first Guidelines for Collateral Practitioners by ISDA’s Collateral Committee in 1998, professionals have sought to improve the collateral process. Recent contributions by the industry, which are referenced in the Best Practices, include the 2009 Recommended Practices for Collateralized Portfolio Reconciliation, Standards for the Electronic Exchange of OTC Derivative Margin Calls, the 2010 Market Review of Bilateral Collateralization Practices and the Independent Amount Whitepaper.

Download the paper here: