Momentum is building behind the International Swaps and Derivatives Association’s (ISDA) clearing connectivity standard (CCS). Four OTC derivatives clearing brokers confirmed their support for the standard on the day – June 10 – that phase two of the US Commodity Futures Trading Commission’s (CFTC) clearing implementation schedule came into effect.
 |
| Gary Gensler, outgoing CFTC chairman |
Clearing brokers, Bank of America Merrill Lynch, Barclays, JPMorgan and UBS, joined custodians BNY Mellon, JPMorgan, Northern Trust and State Street to throw their weight behind the standard. Initially focused on the US, the standard ultimately will be rolled out globally. Central clearing has become part of the G20’s agenda, and mandatory clearing is being implemented to address the risks in OTC derivatives trading that were exposed during the Lehman Brothers collapse.
As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFTC has mandated that certain OTC derivatives products be centrally cleared. The outgoing CFTC chairman Gary Gensler has stated that the Act brings comprehensive regulation to the swaps marketplace for the first time. The regulation, he said, would bring lower risk, transparency and protection to the American public.
Phase two of the CFTC’s timetable covers hedge funds, asset managers and regional banks that trade swaps. A further phase will be implemented in September.
Across the Atlantic, the European Market Infrastructure Regulation came into effect in January. Combined, these initiatives cover the vast majority of OTC interest rate swap contracts and mandate central clearing.
CCS is an industry standard that helps improve OTC derivatives reporting and communication for asset managers, clearing brokers, custodians and service providers. In 2012, CCS was endorsed by ISDA, which worked with Sapient Global Markets – a financial services technology company – to further develop the standard for industry-wide adoption.
The CCS covers cleared interest rate swaps, credit default swaps and non-deliverable forwards and data related to trade, position, margin and collateral for London Clearing House, Chicago Mercantile Exchange and IntercontinentalExchange (ICE) products.
ISDA is also in talks with Eurex, the Toronto Stock Exchange and the Singapore Stock Exchange to gain support for the standard.
Speaking during a webinar in June, ISDA chief executive Robert Pickel said CCS was a “further iteration” of ISDA’s work on the financial products mark-up language, which is an open source XML standard for electronic dealing and processing of OTC derivatives.
“We are moving forward with automation, particularly in the light of regulatory demands around the world for safe and efficient markets,” he said.
The original idea for the standard came from custodians BNY Mellon, Northern Trust and State Street, who in 2012 approached Sapient for help to tackle the fragmented futures commission merchant (FCM) market.
As OTC derivatives trading is migrated to CCPs, buy-side firms have to deal with multiple FCMs across all of their different funds. Custodians interact with these FCMs on behalf of their buy-side clients.
The three custodians that approached Sapient had identified a substantial problem in the lack of standardization among FCMs – information was being sent in a variety of formats and across different channels. They believed a standard was required.
Judson Baker, senior vice-president derivatives products and strategy at Northern Trust, says one of the firm’s primary objectives is to support cleared swaps in an accurate and user-friendly manner.
“We spent a lot of time to identify the data from clearing brokers that we need for activities such as margin settlements, position management and reconciliations,” he said during the June webinar.
“We are seeing activity from a handful of clearing brokers providing this information and expect it to grow, but we fear that without a standard universe of data elements and agreed formats there will be at best a large effort on the part of custodians to map and configure unique broker files and at worst may result in misunderstandings and gaps.”
Further development of the standard will be driven by an ISDA CCS steering committee and working group, comprised of the largest and more prominent clearing firms, who represent the core of the industry.
Ray Kahn, head of OTC clearing at Barclays, said in a statement: “The CCS format will simplify and align margin and portfolio reconciliation processes. We see the standard as a solution that will help to drive post-trade efficiencies for our clients.”
Baker said the focus for most industry participants in the US is on the September 9 deadline for phase three of the CFTC central clearing initiative. On this day category-three participants, defined as third-party sub-accounts, as well as all other swap transactions, will come under the remit of the laws.
“The September deadline imposes mandatory clearing for many more of our clients, such as pension funds,” said Baker. “The standard would be great to have for June, but realistically it will be of more benefit for September. We can throw more bodies at the problem in June.”
ISDA is hailing the support of clearing brokers as the latest step in an industry push to standardize OTC derivatives margin statement reconciliation processes for all market participants. The more CCS is adopted, says ISDA, the more streamlined processes will become as multiple reporting formats will be eliminated.
ISDA hopes to persuade more exchanges to sign up to the standard as well as more industry participants. Files and formats also will be refined.