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The new clearinghouse will be called New York Portfolio Clearing (NYPC) and it aims bring together cash positions and their natural derivatives hedge together into a single pot for improved risk management and improve capital efficiency.
"This will bring the cash and repo securities markets together with the listed derivatives market and potentially the OTC derivatives space," says Murray Pozmanter, managing director of fixed income product management at DTCC.
He adds that the new clearinghouse will provide a portfolio level view of participant positions across the cash and derivatives market. "It uses a one-pot approach with consolidated risk in one place. In the existing arrangements each clearing house margins its own portfolio," adds Pozmanter.
Following the launch of NYSE Liffe U.S., the exchange's U.S. futures business, the exchange was looking for a way to enter the clearing space.
"We had been strategizing on how to successfully compete in the interest arena in the U.S.," says Tom Callahan, CEO of NYSE Liffe U.S. "But there is a large barrier to entry in the interest rate futures market in the U.S."
So it had to be something different that NYPC would bring to the table, adds Callahan, who explains, "Not only do we avoid split margin pools, we go one better and many of the futures trades will be risk reducing trades at the FICC as the asset will be paired with its natural hedge. The ability to deliver capital back to the market becomes a powerful incentive for people to trade on our platform."
The new clearinghouse will leverage DTCC's Fixed Income Clearing Corporation's (FICC) technology for risk management, settlement, banking and reference data.
It will also utilize NYSE Euronext's TRS/CPS clearing technology, which is used for member position management for the NYSE Liffe market in London and ICE Clear in Europe.
"NYSE, through its merger with Liffe, has the technology for the futures space to employ for front office trade capture and back office trade management," explains Pozmanter. "The FICC in turn will enhance its existing risk management technology and infrastructure to do portfolio margining across both asset classes."
Callahan adds, "We have Liffe Connect in London and it's a terrific system and well distributed, which is an important part of being able to compete in the U.S. market, but that's not enough. We needed an innovative clearing solution and to solve the capital issue. Through our partnership with FICC we have that."
Executives expect NYPC to be up and running by the second quarter of 2010, pending regulatory approval.
Under the 50/50 joint venture NYSE Euronext will commit $50 million financial guarantee to reinforce the safety of the NYPC default fund. NYPC will start with clearing interest rate products traded on NYSE Liffe U.S. and will have the ability to add other exchanges.
Dennis Dutterer will serve as interim CEO of NYPC. He previously spent 20 years at The Clearing Corporation and has also served as interim president and CEO at the Chicago Board of Trade.
