Private credit might be less attractive than it was last year as investors rush into the market, but there are sweet spots to be found.
Trade Information Warehouse launched this month as a complement to Deriv/Serv, DTCCÆs trade confirmation and matching service for derivatives (the derivatives equivalent to Omgeo).
Although Deriv/Serv handles derivatives for interest rates, equities, foreign exchange and equities, its biggest business is in credit. DTCC reckons it processes 80% of all credit derivatives; the International Swaps & Derivatives Association (Isda) estimates the total credit derivative market has a notional value of around $26 trillion.
Encouraged by regulators in the United States, United Kingdom and Germany, DTCC set up the warehouse to automate the post-trade life of credit derivatives. Functions such as payments remain manual processes: quarterly payments may vary depending on credit events or changes stipulated in the contract.
Regulators have grown concerned about the huge volumes of credit derivatives, as many hedge funds trade these contracts like stocks. This has prevented banks and other counterparties to keep pace as volumes of products like credit derivative swaps race ahead.
Using standards developed by Isda, Deriv/Serv has allowed most of these contracts to be matched and confirmed electronically through a central platform. Along with 25 dealers, the service is used by nearly 700 buy-side firms across tens of thousands of accounts, says Bill Hodgson, vice president of business development at DTCC in London.
Starting this month, any new contract details will be entered into the warehouse. But this leaves a backlog of up to three million contracts that are still live, but were processed on Deriv/Serve before the warehouse was launched.
ôWe want the warehouse to become the book of record for the credit derivatives market,ö says Hodgson. ôNext year we will ask the buy side to engage with the dealers and schedule a period to backload all the old trades, so we can re-match them and let the information flow to the warehouse.ö He says the DTCC will help coordinate these meetings if requested, depending on how busy the dealers are.
The DTCC needs those investors to find time with their dealers to backload data for their outstanding CDS trades. Most buy-side firms are in North America and Europe, because thatÆs where the CDS market is. But there are a few hedge funds in Hong Kong that use the service, including Central Asset Investors, Income Partners, PMA Investment Advisors (a unit of Sparx Asset Management in Japan) and Trigon Asia Credit.
Other regional users include DBS Bank, GIC and UOB Asset Management in Singapore, virtually all the banks in Australia, and Mizuho Securities in Japan, although this is through its London branch, which trades credit. The CDS market has virtually no Japanese participants.
Hodgson says DTCC is considering putting someone in the Asia time zone to help market Deriv/Serv and its warehouse, as use of credit derivatives is likely to grow. The organisation has an office in Shanghai but thatÆs dedicated to its automated corporate actions service. The DTCC also plans to extend the warehouse to cover equity and other types of derivatives, once it has a handle on the CDS market, and assuming there is sufficient market demand.
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