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DTCC Provides Further Market Transparency on OTC Credit Derivatives

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The Depository Trust & Clearing Corporation (DTCC) today has brought further transparency to the global credit default swaps (CDS) market, worth more than US$31 trillion, by expanding its public release of CDS data maintained in its Trade Information Warehouse to include historical information on those contracts.

The warehouse is a comprehensive global repository for the OTC credit derivatives market. DTCC gathers and stores in this global repository information on OTC credit derivatives and performs critical post-trade processing functions such as automated calculation, netting and central settlement of payment obligations, as well as settlement of credit events such as bankruptcies. The expanded data release will now show information on the legally binding records from the previous week, month and year, in addition to the data for the current week.

DTCC first began publishing the CDS information from its global registry on 2 November 2008. Initially, DTCC will use the first week of data posted in November 2008 for the “year ago” data until actual “year ago” information becomes available in November 2009. This expansion will allow market participants, regulators and the public to gain greater perspectives on trends and changes in the values of these instruments.

“Because nearly all credit derivatives transactions are registered and maintained in the warehouse’s global repository, the industry and regulators worldwide are able to assess from a central vantage point the value and risk exposures of the market, which is essential in times of crisis,” Stewart Macbeth, DTCC managing director and head of the Trade Information Warehouse, said. “Transparency has also been enhanced in the marketplace, as the repository is able to provide the investing public and regulators with a view of the data registered in the warehouse, which we release publicly on a weekly basis.”

The warehouse proved critical a year ago this month, when Lehman Brothers declared bankruptcy. When rumours sent shockwaves through the market predicting that potential net liabilities on credit default swaps on outstanding Lehman CDS obligations could top US$400 billion, DTCC was able to step in and dispel this misinformation by publicly releasing data from the warehouse showing that the actual amount would be less than US$6 billion. This had an immediate calming effect on the market.

The warehouse has also allowed for the rapid rollout of central counterparties (CCPs) in both the US and Europe, since those CCPs were able to focus on developing risk management and collateral systems by leveraging the infrastructure already available in the warehouse to provide other services. Three CCPs, ICE Trust US, ICE Clear Europe and Eurex are currently processing CDS trades. The warehouse provides asset servicing such as payment reconciliation, centralised settlement, name change processing and credit events processing, among other services.

The warehouse historical data will not include information on the more customised trades which were added into the warehouse in July by major firms involved in CDS trading. Those trades are too customised to be stored in the warehouse in their full, legal form, like most other CDS data, but basic data on the contracts are available to provide regulators with a better view of the total CDS risk being taken on by key firms.

The total value of the legally confirmed credit derivatives held in DTCC’s warehouse generally has been trending down, mostly as a result of efforts by the industry to eliminate offsetting trades to the extent possible. As of 21 August the gross notional value of those CDS trades in the warehouse was US$25.6 trillion, down from US$33.56 trillion when DTCC first began publishing its data in 2008. An additional US$5.7 trillion in customised trades are also in the warehouse.

Although the overall value is down, the value of trading in specific indices and single name reference entities has shown significant changes over time.

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