Omgeo and EuroCCP are to launch a pan-European equities central counterparty (CCP) service for hedge fund transactions.
The jointly developed service will mitigate the counterparty risks and reduce the inefficiencies that today characterize the hedge fund/prime broker/executing broker processing chain, Omgeo and EuroCCP, a European subsidiary of DTCC, said in a release.
The new processing solution will be based on Omgeo Central Trade Manager, 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 partners said.
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, they said.
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, according to the release.
Omgeo and EuroCCP said they 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," Diana Chan, CEO of EuroCCP, said in the release.
"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, the two organizations said.
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, according to the release.
Omgeo and EuroCCP are working with a Brokerage Industry User Group (IUG) to develop the new processing solution.