NetOTC launches bilateral platform for non-cleared OTC derivatives
LONDON, 3 November 2015 – NetOTC, a provider of innovative risk solutions, today announced the launch of NetOTC Bilateral, the end-to-end bilateral market infrastructure for the margining of non-cleared OTC derivatives. The OTCS Space interview their new CEO Roger Liddell to find out more.
The bilateral margin rules for non-cleared OTC products rules take effect next September 2016. NetOTC has been quietly designing a platform to solve the many challenges of those new rules, and has finally gone public. The OTC Space met with CEO Roger Liddell, to find out more.
The bilateral margin rules for non-cleared OTC products rules take effect next September 2016. NetOTC has been quietly designing a platform to solve the many challenges of those new rules, and has finally gone public. Along with the public launch of their service they are announcing that Roger Liddell is taking on the role of CEO. Roger was previously Global Head of Operations for Goldman Sachs, and Group CEO of LCH.Clearnet Limited. The OTC Space met with NetOTC CEO Roger Liddell, to find out more. (Also check out the two PDF attachments below, and their new website at www.netotc.com)
OTCS: Can you explain what the new service?
NetOTC: Many firms currently have Credit Support documents in place and exchange variation margin daily. These agreements are bespoke, whereas from September 2016 the largest firms must exchange both Variation Margin and Initial Margin according to specific regulations from global regulators. We've looked deep into the existing problems with margin calls – the frequency of disputes and the settlement risks and designed a new service which addresses these major problems. A key approach is to provide an interface into our service which represents a portfolio of OTC business via risk factors, allowing us to aggregate and match bilateral portfolios in a way which traders understand.
The solution is governed by a unique legal structure that allows IM obligations to be calculated and consolidated into a single daily posting into a central segregated account – something unique to our approach. A key benefit of this structure is that users can pool margin obligations which results in a reduction of the total funding required.
OTCS: How does your service compare to a typical CCP?
NetOTC: We provide single currency settlement per day across your portfolio rather than multi-currency as a CCP would. We also provide central calculation of IM using a third party validated model compatible with ISDA SIMM. We aren’t a party to the trades and don’t operate a Default (Guarantee) Fund. In default we provide a way for banks to receive collateral covering their exposure which is far faster than a typical bilateral model, and return collateral to non-defaulting banks very quickly.
In the current bilateral world disputes are common place and as a result there is a thriving market in portfolio reconciliation tools. We aim to transform this situation by using risk factor matching and 'grossing up’ – calling for the largest undisputed amount we can, to avoid disputes and the resulting capital penalties.
OTCS: Project Blazer is yet to make an announcement on how their service will work – are the two of you similar in approach?
NetOTC: Our platform offers features we believe are unique. For instance we provide banks with the ability to settle a single cross counterparty margin payment once per day into a proprietary segregation structure, in the form of a trust. We provide this settlement service direct to members with the involvement of our consortium member Euroclear. The trust structure gives economic benefits which are shared between users of our platform, this isn’t something any other solution has. This approach complies with all BCBS 261 policies, our calculations have been independently tested, validated and stress tested.
OTCS: How do you charge for your service?
NetOTC: Users pay a membership fee, and NetOTC receives a share of the economic benefits from the trust structure. Other services charge by the trade or for other activity metrics which we wanted to avoid. The trust enables NetOTC to provide funding benefits in a unique new way.
OTCS: How is your platform regulated?
NetOTC: We are a service company regulated by the UK FCA, not a DCO or central counterparty.
OTCS: Is your IM model an implementation of the ISDA Standard Initial Margin Model?
NetOTC: The ISDA SIMM is a blueprint for an IM model, which we have observed when building our own calculator. We are equivalent to the ISDA SIMM – and like any other IM model for September 2016 firms will need approval to use our model.
OTCS: Who are your competition?
NetOTC: We have no obvious competitors for the unique features within our service. A combination of components from other providers may be similar but they may not be a single integrated service company with the unique economic and legal approach we bring.
OTCS: Which firms have signed up to use the service?
NetOTC: We can’t go public yet with the firms we are working with. We have working groups which are working aggressively towards implementation and expect to release further details when we can.
OTCS: Many of the new entrants into the market infrastructure space carry backing from banks in the form of an equity stake – is that true for NetOTC?
NetOTC: We are a privately owned company free to act independently.
OTCS: And finally Roger, how does it feel to be back as the CEO of a market infrastructure firm?
PRESS RELEASE 1
LONDON, 3 November 2015 – NetOTC, a provider of innovative risk solutions, today announced the launch of NetOTC Bilateral, the end-to-end bilateral market infrastructure for the margining of non-cleared OTC derivatives.
NetOTC Bilateral is connecting to Euroclear’s Collateral Highway in an effort to answer the market demand for greater transparency, resilience and addressing the market need for funding, capital and operational cost efficiencies.
From September 2016, the mandatory exchange of Initial Margin (IM) comes into effect. NetOTC Bilateral is a sophisticated IM solution that goes beyond the calculation and calling of standard two-way margining.
NetOTC Bilateral is offered as a dedicated service that works with existing service providers. Robust collateral segregation, optimised calculation and simplified implementation features are enabled by an innovative NetOTC Bilateral legal structure that results in unique funding, capital and operational cost benefits.
NetOTC Bilateral uniquely strengthens IM exchange as it eliminates IM disputes, enables a single daily IM delivery to cover all counterparties, and on default, when collateral is needed most, NetOTC Bilateral provides enhanced claims coverage and ensures that all IM is delivered on the next settlement cycle.
Commenting on the launch of NetOTC Bilateral, Neeraj Sharma, Group CEO and Co-Founder, NetOTC said, “We are delighted to launch NetOTC Bilateral. NetOTC Bilateral is not just responding to the principles and policies required by the regulators and the G20, it delivers a complete, integrated and independent market infrastructure that tackles the real implementation challenges presented to us by the market.”
NetOTC Bilateral is available for clients ahead of schedule, with user on-boarding commencing in 2015. It is regulatory compliant, adaptable for future amendments, and aligned to industry principles and initiatives. Specifically suited to existing portfolios and counterparties, NetOTC Bilateral is available for early adoption and coverage in advance of the IM timeline.
Roger Liddell, CEO, NetOTC commented further, “From an operational perspective, banks must find ways to process the multiple margin calculations and transactions that the new rules entail, without rendering the whole process uneconomical. The complexity cannot be underestimated and not tackling the IM and post-default processing is likely to have considerable impact on banks’ already constrained capital requirements.”
Incorporating the exchange and clearing expertise of the TMX Group and the UnaVista matching and monitoring platform of London Stock Exchange Group, the service is further strengthened with key industry partners and leaders.
Olivier Grimonpont, Global Head of Collateral Management and Securities Lending, Euroclear said, “We continue to develop our core business activities, looking for new ways to deliver client value in the areas in which we traditionally operate. Through the Collateral Highway, Euroclear welcomes all collateral givers, takers, intermediaries and infrastructure providers – thanks to a truly open architecture. NetOTC Billateral’s connection into our global collateral management platform is a testimony to the Euroclear innovation agenda.”
This connection will help create a robust, single point of market access for the unclearable OTC derivative market, designed to enable full compliance in a transparent, predictable and cost effective way.
Bob Wigley, Chairman, NetOTC added, “Throughout the process, we have been impressed by the banks’ appetite to engage with our working groups and the priority that senior banking executives are placing on regulatory readiness for the new margin rules. The addition of the Collateral Highway to our infrastructure partners further illustrates the market appetite for a comprehensive approach.”
PRESS RELEASE 2
NetOTC appoints Roger Liddell as Chief Executive Officer
Appointment of cleared world veteran further strengthens management team in advance of launch of bilateral platform for non-cleared OTC derivatives
LONDON, 3 November 2015 – NetOTC, provider of innovative risk solutions, today announced that Roger Liddell has been appointed CEO with immediate effect.
Founded in July 2011 as an independent company, NetOTC employs more than 50 staff based in London and New York. Since its inception, NetOTC’s sole focus has been the development of a new generation of risk management and mitigation solutions for the non-cleared OTC derivatives market.
Roger’s previous experience as CEO of LCH Clearnet, the largest global interest rate swaps and leading multi-asset clearing house, brings a pedigree renowned for the provision of a robust and rigorous risk management framework. Roger Liddell was appointed non-executive board member to NetOTC in 2013 and has been closely involved with the firm since 2011.
This strategic appointment has been timed with the launch of the NetOTC bilateral platform designed and built under the direction of Neeraj Sharma and Matthew Durkin, NetOTC's co-founders. Roger's responsibility will be to now bring the platform to market.
Roger Liddell served on the board of LCH Clearnet Group Limited from 2005 and was Group CEO for five years until 2011. Roger was a director of Euroclear from 2000 to 2005 and prior to that date, worked at Goldman Sachs.
Commenting on his appointment, Roger Liddell, CEO, NetOTC, said, “Having spent more than fifteen years in the clearing and post-trade world, I believe that there has never been a more exciting time for the industry, particularly given the G20 appetite for regulatory reform and greater transparency in the non-cleared OTC derivatives market. I am very much looking forward to bringing NetOTC Bilateral to market building on Matt and Neeraj's sterling work in developing the platform and market model."
The NetOTC leadership team is comprised of Bob Wigley, Chairman, Neeraj Sharma, Group CEO and Roger Liddell, CEO. The platform now built, Matthew Durkin has left the company, and Alberto Giovannini and Robert Barnes serve as non-executive board members.
Bob Wigley, Chairman, NetOTC, added, “I am delighted that Roger has accepted the role of CEO which further strengthens our executive management team. His experience and contacts will be invaluable to our ongoing discussions with regulatory and industry bodies, and in ensuring that the banks have everything they need to benefit from the efficiencies that NetOTC’s market infrastructure proposition can offer.”
Commenting further, Neeraj Sharma, Group CEO, Co-Founder, NetOTC, said, “It has been my pleasure to work alongside Matthew Durkin and develop the NetOTC Bilateral market model and platform, and we wish him every possible success in his new ventures. Roger has been a key advisor for many years and we are delighted that he has taken this full time executive post at a time when the industry addresses some of the most pressing regulatory requirements that offer opportunity for collateral management improvement and capital exposure reduction."