The Federal Reserve Bank of New York welcomes the equity derivative client on-boarding strategy announced today in a letter by the 18 major market participants to continue to promote operational efficiency and reduce risk in the global equity derivatives market.
The strategy aims to increase automation levels for over-the-counter (OTC) equity derivative products and builds on the commitments major market participants made in May 2007. Since then, market participants have executed additional standardized inter-dealer Master Confirmation Agreements (MCAs), which allows for further automation of the equity derivatives infrastructure. Moreover, all firms have met their commitment to process 70 percent of inter-dealer trades electronically and reduce confirmation backlogs by 55 percent by September 30, 2007.
However, significant challenges remain. Standardization of buy-side documentation and client on-boarding onto electronic platforms are interdependent tasks requiring significant bilateral efforts and resources. The strategy announced today outlines a three-phase approach to address these challenges:
|Phase 1: negotiate and publish six new buy-side MCAs by August 31, 2008|
|Phase 2: execute new and existing MCAs with high volume clients|
|Phase 3: process electronically at least 50 percent of eligible trades with dealers’ top 20 clients by March 31, 2008|
Major market participants also continue to address credit derivative operations. The industry's efforts to improve credit derivative processing have helped avert what could have been a significant operational problem when volumes climbed in July and August. Nevertheless, we are closely following the processing challenges of the increased volumes and expect firms to resolve these issues expeditiously.
Also, the New York Fed continues to work closely with other U.S. and international supervisors to encourage participants to take the steps necessary to improve the market infrastructure that supports OTC derivatives trading. In addition to our focus on the equity and credit derivatives infrastructure, the supervisory community will continue to monitor industry progress in processing interest rate and commodity derivatives.
Participants' October 24, 2007 letter
May 15, 2007 press release »
Contact: Andrew Williams