West Palm Beach (HedgeCo.net) – Omgeo and EuroCCP today announced they have launched joint development of a pan-European equities central counterparty (CCP) service for hedge fund transactions. The new service will mitigate the counterparty risks and reduce the inefficiencies that today characterize the hedge fund/prime broker/executing broker processing chain.
The new processing solution will be based on Omgeo Central Trade Manager(SM) (Omgeo CTM), which services trades from execution through to settlement. Omgeo and EuroCCP expect to conduct pilot testing of the new model this year and aim for a 2010 launch of the service.
Currently, the settlement of hedge funds’ trades between their executing and prime brokers occurs as OTC transactions without any CCP guarantee. All parties, including the underlying hedge funds, are exposed to counterparty risk. The introduction of a CCP in this settlement chain substantially reduces counterparty risk between the prime and executing brokers and thereby also substantially reduces the exposure of the hedge fund to their executing brokers. A CCP also enables more efficient operations by netting down the number of transactions that need to be settled.
The profitability of the prime broker/executing broker business is under pressure today due to costly and excessive trade repair procedures and frequent manual intervention in what should be an automated process. The information flows resulting from unmatched trades and trade allegations in the market have strained capacity in the middle and back offices, adding risk for all counterparties, particularly prime brokers. These uncertainties have led to higher than acceptable levels of costly settlement failures.
Omgeo and EuroCCP will mitigate these counterparty and operational risks and inefficiencies with an institutional trade processing model that will route hedge fund/prime broker equity trades — as well as other over-the-counter transactions — from trade matching through central counterparty netting and onward to settlement finality. The model will enable a prime broker to authorise locked-in trades and release them to EuroCCP, where the trades will be guaranteed, netted and routed to the proper European central securities depository (CSD) for settlement on a netted basis.
"EuroCCP is pleased to join forces with Omgeo on this important initiative for the hedge fund community," said Diana Chan, CEO of EuroCCP. "We have a shared goal: to deliver automation and its benefits to as many counterparties as possible. With Omgeo’s strong base of hedge fund clients and EuroCCP’s robust central counterparty infrastructure and risk management expertise, together we can extend our capabilities to prime brokers and executing brokers."
"EuroCCP has done a fantastic job in offering the lowest settlement costs for its participants," said Marianne Brown, president and CEO of Omgeo. "By working together to streamline trade processing for hedge funds, prime brokers and executing brokers, Omgeo and EuroCCP hope to reduce settlement costs even more. Together we share the goal of greatly reducing post-trade and settlement risks and look forward to leveraging each other’s expertise to bring meaningful value to the prime broker world."
The Omgeo/EuroCCP processing solution initially will cover equities in 15 European markets and seven currencies. By netting customers’ gross obligations, EuroCCP will dramatically reduce the number of settlement transactions. (Note that, due to stamp tax regulations, netting is not likely to occur in the near term in the UK and Ireland.)
Hedge funds will access this CCP solution through Omgeo CTM and through their executing and prime brokers who are EuroCCP Participants. This CCP solution will require no additional technology build-outs or investments by Omgeo CTM customers who are EuroCCP Participants. EuroCCP Participants will be able to access the new service using their existing links to EuroCCP and their existing reports. Clients who use Omgeo CTM will be able to take full advantage of the CCP solution’s benefits, which include the elimination of settlement pre-matching and a streamlined infrastructure.
Omgeo and EuroCCP are working with a Brokerage Industry User Group (IUG) to develop the new processing solution.
Annelise Grant, +1 617 856 2364
Melissa Rowling, GreenTarget, +44 (0)207 680 5051
Deborah Eisenberg, Cognito, +1 646 395 6300
Melanie Best, +1 212 855 5127
Lucie Holloway, Citigate, +44 (0)207 638 9571
Omgeo creates certainty in post-trade operations through the automation and timely confirmation of the economic details of trades executed between investment managers and broker dealers. Every day Omgeo enables an efficient community of more than 6,000 financial services clients in 46 countries to manage matching and exception handling of trade allocations, confirmations, and settlement instructions. Omgeo has also extended its trade lifecycle coverage to include counterparty risk management, which supports end-to-end collateralization and reconciliation across multiple asset classes. Leading organizations rely on Omgeo to help manage an increasingly complex investment industry by providing operational stability and solutions that complement the focus on profitability in an era of escalating trade volumes. Across borders, asset classes, and trade lifecycles, Omgeo is the global standard for operational efficiency across the investment industry. Formed in 2001, Omgeo is jointly owned by the DTCC and Thomson Reuters.
For more information about Omgeo, please visit www.omgeo.com.
European Central Counterparty Limited (EuroCCP) is a UK-incorporated, FSA-regulated Recognised Clearing House. It is the European subsidiary of The Depository Trust & Clearing Corporation (DTCC) and is headquartered in London. EuroCCP was formed to provide clearing and settlement services for a wide range of trading venues across Europe, offering the scale economies of the US market and risk management expertise to European market participants. It currently clears equity trades in 15 countries and in seven different currencies. EuroCCP has been appointed to provide central counterparty services by Turquoise, SmartPool, NYSE Arca Europe and Pipeline for equity trades. EuroCCP is also working with SecFinex to develop a central counterparty solution for securities lending and borrowing transactions. EuroCCP has also entered into a Memorandum of Understanding with NASDAQ OMX to provide clearing services for its exchanges in Copenhagen, Helsinki and Stockholm. Market participants can trade equities on any venue EuroCCP supports and have their transactions netted for settlement and/or margin purposes for the same security traded on the same day, thereby reducing costs and operational risks.
The Depository Trust & Clearing Corporation (DTCC), through its subsidiaries, provides clearance, settlement and information services for equities, corporate and municipal bonds, government and mortgage-backed securities, money market instruments and over-the-counter derivatives.
In addition, DTCC is a leading processor of mutual funds and insurance transactions, linking funds and carriers with financial firms and third parties who market these products. DTCC’s depository provides custody and asset servicing for more than 3.5 million securities issues from the United States and 110 other countries and territories, valued at $27.6 trillion. In 2008, DTCC settled more than $1.88 quadrillion in securities transactions. DTCC has operating facilities in multiple locations in the United States and overseas. For more information on DTCC, visit www.dtcc.com.