TO:Distribution

FROM:Macrina DiGregorio

SUBJECT:OTC Derivatives Ops/Tech Committee Meeting

DATE:October 4, 2002

______

Attendees:

Firm/Name /

Location

/ Firm/Name /

Location

Bear Stearns / Lehman Bros.
Tom Dinneny / NY / Diana Nottingham / NY
Chris Mullen / NY /

Merrill LynchLogic International

Citigroup / Brian CarrollMarie-Noel Bastien / NYNY
Warren Braganza / NY / Eileen YinPhilippe Berckmans / NYNY
Sanjay Makker / NY /

Morgan StanleyMerrill Lynch

CSFB / Calum MacaskillBrian Carroll / LondonNY
Petra Bozeva-Lyons / London / Madhu PhilipsEileen Yin / LondonNY
Gordon McDermid / London /

Christopher ToveyMorgan Stanley

/ London
Caroline Nétange / London / Salomon Smith BarneyCalum Macaskill / London
Deutsche Bank / Kiran PatelMadhu Philips / NYLondon
Nigel Adams / London / UBS WarburgChristopher Tovey / London
David Sclater / London /

Tony CotterillSalomon Smith Barney

/ London
Jonathan Smart / London / Graham RussellKiran Patel / LondonNY
Ian Wyness / London /

DTCCUBS Warburg

Goldman Sachs / Peter AxilrodTony Cotterill / NYLondon
Chuck Davis / NY / Macrina DiGregorioGraham Russell / NYLondon
Calvin Lee / NY /

Jacob FeuchtwangerDTCC

/ NY
Dan Ruperto / NY / Russ GrandnerPeter Axilrod / NYNY
Sharon Seibold / NY / Robert GreenMacrina DiGregorio / NYNY
Shel Xu / NY / Chris HenshawJacob Feuchtwanger / NYNY
J P Morgan Chase / Cory StarkRuss Grandner / NYNY
Michael Beckley / London / Bernie TillRobert Green / LondonNY
David Bizet / London / Marie-Noel BastienChris Henshaw / NYNY
Mayanra Castellanos / NY / Philippe BerckmansCory Stark / NYNY
Sri Rao / NY / Bernie Till / London
Digby Strong / London

DTCCCSFBJPM Chase

Peter AxilrodGordon McDermidSrinivasan Rao

Robert GreenPetra Bezova-LyonsMayan Castellanos

Bernie TillCaroline Nétange

Macrina DiGregorioDeutsche Bank

Russ GrandnerUBS WarburgNigel Adams

Cory StarkTony CotterillDavid Sclater

Chris Henshaw

Jacob FeuchtwangerMorgan Stanley

Marie-Noel BastienOliver StuartMerrill Lynch

Philippe Berckmans Madhu PhilipsBrian Carroll

Christopher ToveyEileen Yin

Goldman SachsLehman BrosCitigroup

Calvin LeeDiana NottinghamSanjay Makker

Dan RupertoWarren Braganza

Sharon SeiboldBear Stearns

Shel XuChris MullenSalomon Smith Barney

Chuck DavisTom DinnenyKiran Patel

The second meeting of the Derivatives Operations and Technical Committee met in New York and London via videoconference. The highlights of the meeting are as follows:

  • Peter Axilrod opened the meeting with the preliminary results of the deal volumes received from the firms. He made the following comments:
  • There were two firms that still did had not submitted their volumes.
  • A good percentage of the credit derivative volumes were brokered. He questioned that since DTCC can accommodate IDB trades, would it be worthwhile to include this functionality into the first product release?. A decision would be needed ASAP if it were decided to include it in this release.

Based on the volumes received, there is no clear ‘winner’ between Return Swaps and Equity Options. However, the committee was leaning towards Equity Options due to their slightly higher volumes and value. In addition, the committee agreed Equity Options are a more straightforward derivative type in comparison to the Return Swap. This will be referred to the committee for a final decision.

  • Bob Green reviewed the Conceptual Solution document with the committee. He noted that this is an abridged version of what DTCC is proposing, rather than how DTCC would implement. Bob went through the five major features:
  • Standard message
  • Communications
  • Trade matching
  • Web front end
  • Historical repository

Standard Messaging

Three types of actions expected from the firms:

  • trade entry
  • trade modification
  • unilateral trade cancel

DTCC will respond with the following messages to the firms:

  • trade confirmed
  • trade unconfirmed acknowledgement
  • alleged trade notification
  • cancel notification
  • cancel confirmed
  • reject

These messages are expected to be standard, with a common flow regardless of the full or streamlined confirm used and regardless of derivative type.

Trade Entry

Each time a firm enters a trade, DTCC will return either a confirmed/unconfirmed message or a reject in the event of an error. In addition, the counterparty will receive an alleged or confirmed/unconfirm message.

If there are 3 identical trades that are eligible for matching to one submitted trade, the system will match the first eligible trade and return the other two back to the unconfirmed matching pool.

If the submitted trade is for 30M, the system will not accept 3 trades at 10M each. It will look for an exact match, ie. one-to-one not one-to-many match.

Question: Does the system change the DTCC Reference number each time the trade status changes? This question was referred to the Tech Subcommittee, as there are various solutions to this issue.

Question: Will Termination, Amendments and Assignments be handled in the first release? DTCC’s original proposal was that this would not be handled in the first release, due to the time constraints of collecting rules and identifying fields for this function. However, it was strongly recommended by the attendees that without this feature, while solving the problem of trade confirmation, other problems would arise with handling Terminations and Amendments outside the system. If trades went outside the system, it was explained that this would create paper matching and breaks, become inefficient for Operations and lose the DTCC repository of data. It was noted that even canceling the trade and resubmitting a new trade would not suffice, since the Trade ID rarely carries through the life of the trade. It was concluded that Termination (Partial/Full) and Amendments functionality is necessary for the first release. Assignments would be deferred for a later release. Bob noted that he would review the effort with his development group and prepare a straw man for the next meeting. However, he noted that information on the current Termination and Amendment process would need to be gathered from the firms in order to assess the effort.

Communications

The committee reviewed the Architectural Overview Diagram and the types of communication protocols DTCC can support. They were Swift/Radianz, SIAC Datatrak/Autoroute, DTCC Frame Relay and Internet. Narrowing down the communication options is crucial for the pilot phase as each communication methodology will take development work. It was noted that regardless of the protocols used, the input would be put into a common message format for validation, trade matching and keeping historical data. The initial consensus was to support an automated feed through the Internet since it is most likely the easiest and fastest way to link. It was noted that DTCC would support both Batch and Real Time interfaces. This discussion will be deferred to the Technology Subcommittee next week.

Matching

The committee reviewed the assumptions for the matching model and several questions were raised.

Question: How will the system validate against different Legal entities? The idea of a Family Table was discussed. Upon signup, firms would be responsible for setting up their family of Legal Entities, which DTCC would maintain on each firm’s Entity Table. This would be used in the matching criteria and validated for eligibility against the assigning firm. It was suggested the Ops committee revisit this in the subcommittee.

Question: How long is the message retained if it is unmatched and what defines the legal contract? The message could be retained indefinitely; however, further consensus is needed.

There was a discussion on the systems capability to filter specified messages going to firms in order to cut down on the message intake. Bob noted that this would need further analysis on how the firm profile might be modeled in order to support this function.

This concluded Bob’s walkthrough of the architectural concept and he requested that all firms review this Conceptual document and invited any comments or concerns.

  • Chris Henshaw distributed the Field Matrix for the Single Reference Entity Credit Swap. Chris noted this matrix reflects the universe of fields for the Credit Derivative type, which were 139 fields. He raised the discussion of the use of Master Confirm Agreements. Firms reported that many have a transaction supplement already in place with their counterparties, which reduces the fields on the confirm trade entry considerably. Chris noted, although DTCC will support a full confirmation, they would also want to support a streamline confirmation. There was extensive discussion on creating a transaction supplement or bilateral information. It was noted, existing transaction supplements may be used. The question was raised, who was using them and how similar are they?

The issue of continuity of Reference Entity data was raised. There is concern the process would be fragmented and not as effective if this is not effectively addressed in the first release. A discussion of multiple entity firms with public and private reference entities was reviewed. This issue goes to the heart of Credit Derivatives. It was stated that this issue should be dealt with separately and there are external efforts in progress to try and address this problem.

Chris continued defining the columns in the matrix and the various fields. He requested the firms review this matrix for content and return comments to him, along with thoughts on using a full vs. streamline confirm. Chris requested examples of the mini master agreements being used with the counterparties for comparison analysis.

The last item discussed was the subcommittee meetings that will take place next week. The committee will break into two groups next week, Operations and Technology, to get the specialists to address their area of expertise and to drill down into the detail and the issues.

The next meeting will be held on Thursday, October 10th from 10:00 AM to 1:00 PM New York Time and 3:00 PM to 6:00 PM London Time. The following is the meeting schedule:

Operations Subcommittee 10:00 AM to 11:30 AM New York Time

3:00 PM to 4:30 PM London Time

Technology Subcommittee 11:30 AM to 1:00 PM New York Time

4:30 PM to 6:00 PM London Time

Action Items

DTCC

  1. Straw man for the Equities Matrix
  2. Straw man for the Termination/Amendment process
  3. Results of Master Confirm analysis

FIRMS

  1. Submit Master Confirms for analysis
  2. Comments on the Credit Field Matrix
  3. Assist in the data gathering for Termination/Amendment process
  4. Submit percentage of trades that are publicly traded entities
  5. Submit examples of the bilateral mini master agreements existing between trading counterparties for comparison analysis

DTCC Contact List

Contact / Phone Number / E-mail Address
Product Team
Peter Axilrod
Chris Henshaw
Janet Wynn / 212-855-2705
212-855-1355
212-855-3870 /


London Team
Bernie Till / 0207 444 040215 /
Project Team
Keith Kanaga
Macrina DiGregorio
Cory Stark / 212-855-1675
212-855-1668
212-855-1683 /


Technology Team
Robert Green
Jacob Feuchtwanger
Russell Grandner / 212-855-2880
212-855-8778
212-855-5615 /


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C:\Temp\Minutes 03_10.docC:\Temp\derivative committee minutes 103.docN:\LANSHARE\OTC Derivatives\Documentation\Committee-session2\derivative committee minutes 103.docG:\London\TRACER\Ops & Tech Committee\derivative committee minutes 103 BT version.doc