Digiterre Touts Low Rates for Derivatives Confirmation Service
May 26, 2008
London-based Digiterre, a provider of technology to alternative investment firms, is seeking to take a piece of the fast-growing over-the-counter derivatives processing and confirmation market with a new hosted service.
Digiterre, which counts London-based hedge funds BlueCrest Capital Management, Man Investments and the Children's Investment Fund Management as clients, calls the service a straight-through processing (STP) hub. Expected to launch in the third quarter, it will allow funds to connect directly through their order management or execution management system to a single platform for derivatives confirmations. In turn, the hub will connect to leading confirmation services such as Swaps-Wire--which Markit Group agreed to buy in December--Depository & Trust Clearing Corp.'s (DTCC) DerivServ and, eventually, IntercontinentalExchange's eConfirm service.
"If you're a hedge fund that's been trading [multiple] assets--interest rate swaps and credit default swaps--you will need to connect to both SwapsWire and DTCC, and that can get quite expensive quite quickly," said Ravi Sawhney, head of trading solutions at Digiterre.
According to Digiterre, the STP hub, which will compete directly with Markit Trade Processing, will cost funds 50 percent to 75 percent less than other OTC derivatives confirmation platforms. The company plans to offer volume-based pricing, charging less-active funds lower fees and increasing them as their derivatives volumes grow.
A Markit spokesperson declined to comment on the offering.
"It's a six- to nine-month job for a hedge fund to build an interface to SwapsWire and DTCC, and then you need someone--at least one full-time person--continuously on staff to maintain the links," said Sawhney. Individuals capable of such work are often systems integrators with FpML, or financial products markup langue, experience who are likely to be in high demand.
Sawhney said that customers will have the option of connecting to the new service via the company's one-year-old dConfirm platform for the management of paper-based derivatives transactions.
No-Touch STP
As a managed service, Digiterre's STP hub, which utilizes Microsoft .Net and FpML, is easily scalable. And it will reduce risk and the opportunity for human error by automating what is often a manual process. The new service "will facilitate the nirvana of no-touch STP, which is what operation managers strive toward," Sawhney said. "It doesn't require someone to sit there to catch the breaks or failures."
Currently, many smaller and medium-sized funds do a certain amount of manual processing in-house but also use services provided by their fund administrators or prime brokers, who may themselves rely on a great deal of manual processing.
A less costly managed hub service for derivatives processing could be well received by the marketplace, observed Denise Valentine, senior analyst at Boston-based Aite Group. "The price of derivatives processing has been an issue for hedge funds and other buy-side firms," she said. It creates efficiency problems for some and keeps others from entering the market as extensively as they otherwise might.
However, Valentine noted that Digiterre's service faces several challenges. For one, it will compete against offerings from established providers Markit, SmartStream Technologies, T-Zero and interdealer broker Icap's Traiana subsidiary, among others. Also, many funds are hoping that sell-side firms will ultimately assume responsibility for OTC derivatives processing. In order to compete, Valentine said that Digiterre will need to leverage its reputation in the hedge fund community and create a user-friendly system.
