DTCC, Markit to Create Single Point of Derivatives Confirmation

Washington's calls for efficient, automated processing of over-the-counter (OTC) derivatives has grown to a clamor that vendors and Wall Street firms can't ignore. Just today, Acting Under Secretary for Domestic Finance Anthony Ryan said, "With respect to market infrastructure, we are encouraging the development of an integrated operational infrastructure for the OTC derivatives market that ensures accuracy and timeliness of trade data submission, resolution of trade matching errors, and integrated processing. We are calling for a cash settlement protocol adopted by market participants and incorporated into standard documentation, and for netting, novation and clearing of OTC derivatives contracts by a centralized counterparty."

In answer to this demand -- an echo of earlier statements made by Alan Greenspan and Ben Bernanke -- the DTCC and Markit announced today the formation of a new company that will combine Markit's front- and middle-office trade processing services with DTCC Deriv/SERV's back-office post-trade confirmation and matching services, providing a single gateway for confirming OTC derivative transactions globally. Buy-side and sell-side OTC derivative market participants will be able to confirm trades and to gain access to additional services provided by Markit and DTCC through a common portal.

Industry observers responded favorably to today's announcement. "Buy-side firms are not keen to patch together a network of internal and external communication networks and systems, and have been waiting for a major dealer-backed solution," said Denise Valentine, Aite Group senior analyst. "Two dealer-backed entities " in the form of Markit and DTCC " have responded to the buy-side demand and have created a new entity to further the cause of automation and simplification."

And analysts at the Tower Group said, "This partnership will prove to be a critical turning point in the development of a single, global operating infrastructure for the full range of OTC derivatives. The combination of Markit Wire and Deriv/SERV addresses the inefficiencies associated with the current fragmented confirmations landscape, reduces the likelihood of radical regulatory intervention, and eases the strain on industry middle and back offices. Although broker dealers may be concerned that one organization now has monopoly power in OTC confirmations, TowerGroup anticipates that the governance structure will allow the industry to continue to influence the direction of the partnership. TowerGroup expects the partnership will yield a central data repository that can be the springboard for multiple new products, such as portfolio reconciliation and collateral management services."

The new company will comprise Markit's recently acquired Markit Wire platform (formerly SwapsWire) as well as its other trade processing services such as Markit Trade Manager, Markit Tie Out and Markit PortRec. DTCC will contribute its Deriv/SERV matching and confirmation engine and its AffirmXpress, MCA Xpress and Novation Consent services. Additional services that will not become part of the new company include Markit's data and valuation services and DTCC's downstream Trade Information Warehouse, centralized settlement and payment netting services.

This initiative may accelerate the adoption of electronic processing solutions across the rapidly growing, $454 trillion OTC derivative market where approximately 50% of transactions are still confirmed on paper.

The new company will be jointly owned by DTCC and Markit, and will be governed by an 11-member board of directors. Michael Bodson, executive managing director for DTCC's business management and strategy overseeing all DTCC business lines, will be chairman of the new company. Jeff Gooch, executive vice president of Markit, will be the new company's chief executive officer.

In addition to facilitating greater industry adoption of electronic confirmation, the new company will offer automated trade affirmation, trade allocation and novation consent solutions to the market on a cross-product basis. It will initially support both DTCC's and Markit's confirmation platforms.

The new company will be headquartered in London, with a second major centre of operations in New York City and representative offices in Europe and Asia. The combined business will have over 1,100 financial institutions as customers and annual transaction volumes of over 7 million across the OTC interest rate, credit and equity derivative markets.

The DTCC-Markit agreement will become effective following completion of due diligence, regulatory filings and approval by relevant global regulators, including those in the U.K. and U.S. The name of the new company will be announced at a later date.