Fremont, CA — The over the counter (OTC) swaps market has undergone tremendous growth and globalization in recent years. While the potential for profit is greater than it has ever been in trading history, the risks are similarly large. London Clearing House (LCH) together with American Management Systems (AMS) Consulting Group have created the SwapClear risk system, based on Versant Corporation’s robust object technology engine, which will allow wholesale investment banks to minimize risks, free up credit lines and make more efficient use of collateral.
LCH acts as the clearing house for the exchange-traded futures and contracts executed on The London International Financial Futures and Options Exchange (LIFFE), the International Petroleum Exchange, and the London Metal Exchange.
The majority of OTC derivatives transactions are settled between counterparties on a bilateral basis. This exposes each party to the risk that the associated counterparty will default, which, as a credit risk, is more than just a theoretical possibility.
“From the outset of the project, Versant was keen to help us mitigate project risks by ensuring the correct use of the Versant toolset,” said David Craig, Risk Development Manager at AMS. “The main advantage presented by Versant has been its ability to provide a seamless interface between object oriented programming and data storage, thereby improving the productivity of the team and the end product.”
“Object technology, a high degree of reusability and persistence across complex data has enabled LCH and AMS to create a proven and effective method of limiting the counterparty credit risk and systemic risk that has, in the past, been pervasive in the derivatives market,” said Bernhard Woebker, Versant’s Sr. Vice President of Worldwide Operations. “SwapClear, the first clearing system for OTC derivatives market, will firmly position LCH as a leader in technology-based financial clearing.”
As trades are received by SwapClear they are validated against current member exposure before being accepted. This may trigger the need for additional margin payments by the member. In turn, significant market shifts can cause revaluation and likewise trigger margin payments from members to cover resulting higher exposures. At the end of the day all members are re-evaluated based on their end-of-day positions. This re-evaluation looks at the worst-case scenario based on a set of market variables to determine the resulting margin payment. All margin payments are then netted across all books for each member into a single payment. This netting offsets one position against another, and can reduce overall margin levels required by a member, thus freeing up significant collateral.
Through SwapClear, LCH will become the central counterparty to transactions between wholesale market participants, which may enable participating banks and dealers to greatly reduce their overall credit exposure and regulatory capital requirements. Versant’s proven ability in the risk management arena, coupled with its ability to manage complex relationships and computations, means London Clearing House can use Versant as both an end-of-day and intra-day calculation engine performing scenario-based, risk analysis of members’ positions with respect to their OTC derivatives transactions.
“SwapClear was developed within a very tight timeframe. The complexity of the business problem and the need for persistence in complex data meant that a relational database was not an option,” said Guy Ruddock, SwapClear Project Manager at LCH. “Versant’s strength as a true object database meant that it was able to meet the performance and concurrency requirements of the project. In addition, the object approach and the reuse facilitated by the object model meant that the number of bugs was reduced by a third from the very beginning, allowing the developers to deliver a bug-free product in a much shorter timeframe.”
Versant Corporation is a leading provider of high-performance, enterprise database management systems in complex data and distributed computing environments. Versant solutions are used across a broad range of industries including telecommunications, financial services, health care, energy and the emerging market for intranet and transactional Internet applications. The Versant ODBMS and its related products offer distributed enterprises large-scale reliability, scalability and performance for mission-critical applications within existing computing environments.
Versant customers include ADC Telecommunications, AT&T, Alcatel Network Systems, Banque Nationale de Paris, British Telecommunications plc., Broadsoft, CalFP, Chase Manhattan Bank, Chicago Stock Exchange, Dresdner Kleinwort Benson, DSET, EDS, Fleet Bank, GTE Data Systems, Hitachi Telecom, HNC Software, Lucent, National Westminster Bank, Northern Telecom, Object Stream, Sabre Decision Technologies, Samsung, Siemens, Sprint, Schweizerische Mobiliar Versicherung, Texaco, TRW, and MCI WorldCom. Versant is headquartered in Fremont, California.
For additional information, visit http://www.versant.com