March 18, 2015

NetOTC Bilateral and Multilateral Services | up to 73% IM netting & $9bn savings per year

NetOTC updates it's website to describe two new services to address the un-cleared OTC market

NetOTC in London has revealed more details about its two new services intended to benefit the market for OTC derivatives, which are not mandated by regulation to be cleared at an existing CCP. The company describes itself as:

Founded in July 2011 as an independent company, NetOTC has over 60 staff based in London and New York. The company’s sole focus has been on the development of a new generation of risk management and mitigation solutions for the uncleared OTC derivatives market. The NetOTC solutions provide participants with the means to address the regulatory changes and challenges in a timely and cost effective manner, whilst delivering commercial value in the form of collateral and capital efficiency.

Bilateral Service

The bilateral service is described as providing:

  • A centralised methodology for calculating Initial Margin
  • A single IM settlement and dispute resolution mechanism
  • Compatibility with industry trade data standards
  • Central calculation services
  • Settlement of IM on default+1

Multi-lateral Service

The NetOTC Multilateral service "offers a clearing platform for the multilateral netting of non-cleared OTC derivatives. Providing transparent centralised risk management, initial margin optimisation and default management processing, the platform delivers real risk reduction. NetOTC estimates industry cost savings of over $9 billion p.a. through reduced collateral funding costs, as well as reducing both on-and off balance sheet exposures to enable customers immediate leverage ratio benefits."

The service includes:

  • Risk sensitivity matching at portfolio or transaction level
  • PV calibration
  • Rules based risk dispute resolution mechanism
  • NetOTC Initial and Variation Margin calculation
  • Initial and Variation Margin netting
  • Collateral risk management
  • Default close out mechanism

A key outcome of the multi-lateral service is quoted as the "Potential for market wide risk reduction with circa 73% netting" – meaning an dramatic IM reduction compared to "The WGMR estimates. Source: Table 7, p35, Second Consultative Document "Margin requirements for non-centrally cleared derivatives", BCBS/IOSCO, February 2013."

More information over at their website including videos by Board members Roger Liddell (ex-CEO LCH) and Alberto Giovannini, talking about the challenges and benefits of these two new services for the un-cleared OTC derivatives market.

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