J.P. Morgan and EDS have collaborated on the development of a new 100% straight-through derivatives processing system. The two have created an independent company for the system called Arcordia and are looking for investorsother broker/dealer processing clients---to take a share. Currently, J.P. Morgan owns 90% of the venture and EDS 10%, however J.P. Morgan plans to divest at least 40% by bringing in other investors so that it will own a minority share. "The perception of neutrality by clients is very important," notes Jean-Louis Bravard, managing director at EDS. He adds that this is one reason why EDS was brought in as a partner, "Having a company that is a very strong firm but is not a market maker or derivatives trader involved is important." He notes that the two companies have been in active discussions with several potential investorslarge broker/dealersthat would also be clients, though he declined to name them. Bravard adds, "What we want is a company that acts like a company, and not like a club, one that manages for the best of its clients not just to make a few of its financial clients happy."
This system manages the whole gamut of OTC derivatives from plain vanilla swaps to credit derivatives. Arcordia has about 300 employeeswho specialize in technology, operations and businesswho are being transferred from J.P. Morgans payroll. J.P. Morgan has developed all of the systems and hardware and has been plugging away at this project for four years. According to Bravard, "The new company provides best of class processing of transactions on a global basis that uses industrial strength technology." The system was developed in house using C++ and Java. It uses XML for messaging and clients can send transactions or monitor transactions through any Web browser. EDS is going to handle the contractual arrangements and client support.
Arcordia does not handle the front-office piece of capturing transactions or risk management. It takes the transaction at the middle office or just after, Bravard explains. It will manage the back office for the derivatives transaction including resets, all the communication, what you will receive, what you will pay, etc, Bravard notes. It generates the messages for the general ledger and every element of the trade over the life of the trade. "It allows the firm to be a very active derivative player without having any derivatives back office for all OTC derivatives," he adds.
As for competitors, Bravard says Arcordias biggest competitor are the broker/dealers in house systems. Although there are some systems available for derivatives processing such as Summit Systems or Automatic Data Processings OMR, many broker/dealers use their own technology, spread sheets, faxes and phone calls to process derivatives as they are complicated and often entail some manual processing, Bravard says. With its "industrial strength" technology, Arcordia has discovered a way to create a 100% STP environment. However, he notes that there are times when a client might want more control of a transaction and may want to pull it out for manual processing. Clients can do this as well with Arcordia. Bravard explains that if there is a question about currencyfor example during the devaluation of the Indonesias rupiaha client might want more control of the transaction. Or, he adds, if a client wanted to make sure the coutnerparty payment is tracked before they make a payment. He notes, "Sometimes you have to live with this transaction for 30 years. We need to get to an environment where a derivative is processed in the same way as you would trade a fixed income or equity security and over the life of that transaction you have to track every cash flow and with derivatives. This is fairly complex." Officials from J.P. Morgan could not be reached by press time. Arcordias Website is www.arcordia.com.