A new central settlement service from the Depository Trust & Clearing Corp and CLS Bank International has all but eliminated the need for party-to-party financial arrangements in over-the-counter credit-derivatives transactions through the DTCC’s Trade Information Warehouse. According to both clearing firms, the program reduced the amount of trading obligations requiring financial settlements to 98 percent—from $14.3 billion gross to a net $288 million. Gross settlements by the 14 participating OTC derivatives dealers fell to 123 net settlements from 340,000 in the previous quarter, with payments made in five currencies.
The settlement program, initiated more than year ago, works similarly to the CLS’ continuous linked service for large-global banks to reduce settlement risk of international transaction postings (which are otherwise subject to market and valuation changes for transactions between firms operating in different time zones).
“Central settlement provides the credit derivatives market with infrastructure that assures certainty of payment and processing scalability to address the explosion of credit- derivatives-transaction volume and the inherent operational risk of the previous highly manual processes,” said Randolph Cowen, a co-chief administrative officer with Goldman Sachs, in a statement.
