DTCC Will Launch a New Service to Automate Master Confirmation Agreements
DTCC’s Deriv/SERV business will launch MCA-Xpress™ in the second quarter of 2008. This new service will automate the negotiation, execution and storage of master confirmation agreements (MCAs) for over-the-counter (OTC) equity derivatives. MCAs are a key component of the legal documentation that creates legally binding trades between two parties of OTC derivative transactions.
By automating the completion of MCAs, MCA-Xpress will help trading parties move their OTC equity derivative transactions to an electronic matching platform for post-trade processing, in turn reducing the costs and mitigating the risks of these transactions.
Deriv/SERV developed the new service in close consultation with market participants. To build the MCA-Xpress platform, existing industry-published equity MCAs were reconfigured into a user-friendly matrix. As a result, the service supports all industry-published equity MCAs, including the ISDA® Equity MCA Protocol. (ISDA is the International Swaps and Derivatives Association.)
Equity challenges
Among the varieties of OTC derivatives, equity products present unique challenges to market participants. Equity contracts embody multiple combinations of product types and geographic regions, resulting in more than 20 product categories and in MCAs that are lengthy and complicated.
With transactions so complex and non-standardized, it has become common market practice to negotiate equity MCAs bilaterally in a highly manual fashion, which has led to processing backlogs similar to those that characterized the OTC credit derivatives market several years ago. These backlogs and their associated risks have caught the attention of regulators in the U.S. and U.K., and intensified efforts by the OTC derivatives industry to improve the transaction flow for the equity asset class.
“Market participants have been seeking a solution that bridges the gap between MCA execution and electronic trade matching,” said Gina Ghent, first vice president, Business Development, DTCC Deriv/SERV. “By building an application to streamline the first stage of an OTC equity derivative trade – the negotiation of the MCA – Deriv/SERV is helping the industry move to electronic matching and confirmation of these transactions.”
How it works
MCA-Xpress consolidates over 20 MCA templates into six tabs categorized by major product type, sub-product type and region. The service provides users with their own private, secure locations on the platform to manage their MCAs. Counterparties select the dealer(s) with whom they wish to negotiate contracts and then, for each dealer, choose specific MCAs to negotiate.
DTCC Deriv/SERV’s Operating Procedures include provisions to verify that an MCA executed through the service constitutes a legally acceptable method of qualifying the transaction.
Users can also upload and/or provide information related to MCAs that have been executed outside the service, including manually executed contracts. This feature helps the industry build a comprehensive database and audit trail for OTC equity derivative transactions.
MCA-Xpress provides the industry’s first and only central hub where equity derivative MCAs are stored and where dealers and buyside firms can access all the contracts they have executed with their counterparties.
Automation gateway
When two counterparties execute an equity MCA, the firms can submit their transaction for electronic matching and confirmation to platforms such as Deriv/SERV. Given the historically low rates of electronic matching and confirmation for OTC equity derivatives, MCA-Xpress will increase the number of equity transactions that are processed post-trade on automated platforms – helping the industry attain its risk-mitigation objectives for this asset class.
MCA-Xpress’ open architecture allows access to third-party service providers. If a party executes an MCA on MCA-Xpress, the firm can also apply those execution dates to transactions completed on paper or through another electronic matching and confirmation platform. Users can feed proprietary MCAs into MCA-Xpress by starting with an ISDA or industry-published template, adding other terms and then saving the template for negotiation and execution with future counterparties.
MCA-Xpress supports all industry-published MCAs, including ISDA’s Equity MCA Protocol (Q208) and will add coverage of additional MCAs as soon as they are published.
Customers are enthusiastic about the new service, according to Ghent, who previewed the service in a series of user meetings in New York and London last year, and dealers began pilot testing in December. “The OTC derivatives industry is committed to strengthening its operational infrastructure and making OTC equity transactions more efficient,” she said. “With MCA-Xpress, DTCC has delivered to market participants the tools they need to meet this commitment.” @