Euroclear to launch exposure services for OTC derivatives

Euroclear Bank's 'DerivManager' service will reduce valuation and collateral disputes, operational costs and errors in exposure calculations.

DerivManager will provide trade matching and daily portfolio reconciliations between counterparties, helping clients ultimately to determine, match and manage exposures resulting from OTC derivatives transactions. Based on client-provided valuation data of their bilateral derivatives contracts, Euroclear Bank will automatically standardise and compare the two sets of data, detect and report any discrepancies in the mark-to-market values for these trades. In so doing, both counterparties will avoid potential valuation disputes. In addition, DerivManager will net total exposures to reduce collateral requirements to cover exposures.

Frank Reiss, Euroclear Bank's Head of Equities and Derivatives Product Management, commented: "Our move into OTC derivatives exposure management will provide a unique and comprehensive service, one that complements existing services in the market. DerivManager clients will further maximise value by managing their exposure obligations through the outsourcing of collateral management to Euroclear Bank, Europe's leading triparty agent. No other provider offers such proactive OTC derivatives trade matching, reconciliation and exposure-management services."

Mark Rowlands, Co-Chair of the Collateral Framework Group, stated: "The impact of data inaccuracy in the collateral space is significant. By increasing transparency in multi-asset class portfolios, firms are better equipped to manage exposures and collateral downstream. Euroclear Bank's DerivManager is an important move towards providing greater transparency, flexibility and automation in managing bilateral exposures. After months of close collaboration between the Collateral Framework Group and Euroclear Bank, we are delighted that the OTC derivatives market's calls for exposure transparency have been heeded with the arrival of this service."

The three foremost OTC derivatives products - interest rate swaps, credit and equity derivatives - have surged to all-time highs in terms of value (EUR
327 trillion outstanding according to the International Swaps and Derivatives Association). Yet, low levels of post-trade standardisation and automation have resulted in long backlogs of unprocessed transactions, severe reconciliation breaks and problems with exposure and collateral management. Moreover, with the advent of Basel II, it is more and more likely that exposure management will become increasingly complex, as firms shift away from cash towards securities to collateralise their derivatives trades.