As a result of the proposed mandate to centrally clear standardized over-the-counter contracts, market participants are seeking new technology that makes matching and clearing trades faster and easier.
Proposed regulatory changes in the over-the counter (OTC) derivatives markets may create new challenges for large financial institutions. Many OTC market participants have front- and middle-office systems that are built for the bi-lateral trading in the cash markets. Many of these systems cannot centrally clear OTC positions where the counterparty is always the exchange. Where a centrally cleared position is marked to market daily - and in most cases the profit and loss of a position is booked daily - an OTC position's profit and loss is typically only booked at expiration.
CME Group is working with market participants to conquer these and other technology challenges, making it as easy and efficient as possible to incorporate clearing into the trading process. One major initiative is the new CME ClearPort application program interface (API), which will provide straight-through processing for OTC trading while offering clearing firms greater risk controls.
Currently, customers wanting to do a block trade contact the Globex Control Center and then the trade gets printed over market data. The customer then calls up their clearing firm, who types the trade into front-end clearing. Then the opposing clearing firm claims that trade on their side. It is a four-step "handshaking" process.
Launching fourth-quarter 2009, the new API will reduce the trade capture process to just a few seconds from several minutes by electronically submitting all trade details directly from the system at the point of execution.
"Currently, users have to re-key all of those elements into the CME ClearPort Web site or place phone calls to communicate this level of information," explains Nader Shwayhat, business development manager of the commodities and OTC derivatives group at Pivot Solutions Inc.
The new API will reduce errors and automate the trade confirmation, instantly generating confirmation details via e-mails and instant messaging. That will be convenient for firms such as Pivot, which offers automated technologies for OTC markets. "It gives our platform a lot of flexibility because we can allow multiple brokers to use our connection with CME Group instead of certifying for each of their different desks," Shwayhat adds.
It will also offer more security through its integration with CME Group's Risk Asset Value (RAV) system, which performs similarly to a credit-management system. Clearing firms using CME ClearPort can see a list of accounts and how much credit has been used each day, as well as the account's daily credit limit. RAV also allows clearing firms to reset a line of credit and allow, or disallow, specific brokers or products by setting position limits to zero.
Easier registration and administration for users also was a key focus in developing the new API, which will feature click-through agreements that allow users to add new asset classes without getting bogged down with legal documents.
For more information about the new CME ClearPort API, please visit cmegroup.com/clearport.
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