Infrastructure and Systems

Multilateral Netting Facilities

Beginning in 1993 and continuing into 1994, the marketplace experienced a large backlog of unsettled Russia, Panama and Peru loan trades, as settlements failed to keep pace with the large volume of such loan trades. Simply put, loans were never designed to be actively traded, and assignment documentation and settlement procedures were wholly inadequate to keep up with the trading volumes of the rapidly expanding marketplace. As a result, backlogs were encountered at nearly every stage of the transfer process.

In response to this backlog, which increased counterparty risk for all market participants and created considerable systemic risk for the entire marketplace, EMTA developed its Multilateral Netting Facility, with assistance from Price Waterhouse.

From September 1994 to September 2000, EMTA regularly operated the Multilateral Netting Facility to net and settle outstanding trades (or net trade positions) of Russian loans among major market participants. EMTA calculated and advised those participating in the Facility of their net exposures to other participants. Following this netting calculation, participants then settled their net trades (or net trade positions) among themselves, thus reducing the accumulation of open positions and the number of individual trades that were required to be recorded with agent and servicing bank(s).

From September 1994 to November 1996, market participants periodically submitted trade data to EMTA in connection with individual Russian loan trades. In December 1997, following the rescheduling of the commercial bank debt of the Russian Federation, over 160 market participants submitted to EMTA over 2,500 bilateral net trade positions aggregating approximately U.S. $7.3 billion in connection with Russian VEB Loan Participations, ‘when-restructured’ trades of Restructured Loans and ‘when-issued’ trades of Interest Notes.

From April 1998 to August 2000, 8,744 bilateral net trade positions aggregating U.S. $66.5 billion face amount of Russian Prin trades were netted and settled under the Facility.

Finally, in September 2000, EMTA operated the Facility for the netting and cash settlement of all net claims positions relating to the ‘Negative Accrued Period’ (corresponding to Russia Prin trades entered into from October 26, 1998 to November 20, 1998). This Facility expedited the settlement of such claims, reduced counterparty exposure, and netted and settled 160 net claims positions aggregating U.S. $29 million face amount.

In addition, in 1996 and 1997 EMTA operated a Multilateral Netting Facility for the netting and cash settlement of all matched transactions (aggregating approximately U.S. $11.2 million in past due interest claims in Argentina) submitted by over 40 participating institutions.

In 2007 and 2008, EMTA sponsored a Multilateral Netting Facility for Nigeria Payment Adjustment Rights, eight Offset Facilities for Venezuela Oil Obligations and one Trilateral Netting and two Offset Facilities for Nigeria Payment Adjustment Rights. Taken together, 18 market participants successfully completed the netting and offset of deliveries and payments with an aggregate gross value (net of residual unsettled positions) of over US$100 million.

EMTA's Multilateral Netting capabilities continues to be available to the trading and investment community as and when the need arises.

Emerging Markets Clearing Corporation

Most trading of Brady bonds and sovereign Eurobonds in the inter-dealer market occurs through trading screens made available by inter-dealer brokers (IDB's). For all but the least liquid instruments, trading through these screens occurs anonymously (i.e., on a no-name-give-up basis), and resulting trades are settled bilaterally between the transacting dealer (as buyer or seller) and the private clearing firm (generally REFCO) acting on behalf of the IDB.

To support this screen-based trading, and to address concerns about related counterparty risk, EMTA sponsored development in the mid-1990's of the Emerging Markets Clearing Corporation.; EMCC, which began operations in April 1998, brought improved efficiency and reduced counterparty risk to the marketplace for Brady bonds and sovereign Eurobonds by assuming matched trades and delivering settlement instructions directly to the Euroclear and Clearstream settlement systems.

As of January 1, 2004, EMCC was clearing trades in over 437 eligible instruments by 17 participating members (including REFCO), and during 2003, EMCC successfully processed over 155,000 trade inputs and settled trades with an aggregate principal amount of over U.S. $248 billion. Trade matching rates were consistently high; over 90% of trades matched on trade date. EMCC operated as an industry utility, subject to regulation by the US SEC and as part of the family of clearing corporations included in the DTCC complex. Though originally formed as a stand-alone corporation owned primarily by leading market participants and with its own Board of Directors, EMCC was absorbed by DTCC as a wholly-owned subsidiary in 2002, with a common Board of Directors with DTCC, GSCC and MBSCC.

EMCC's operations were terminated on March 31, 2005, after DTCC determined that EMCC lacked sufficient industry participation to be operated profitably and was therefore no longer consistent with DTCC's operating strategy.

In response to the initial indications that EMCC would be shutdown, EMTA formed a working group to identify European-based alternatives to EMCC. Following an extensive process of evaluating industry needs and soliciting and reviewing bids from prospective European service providers, in January 2005 the EMTA working group selected LCH.Clearnet to develop and implement a facility to compare and clear EM bond trades entered into through the IDB screens. While intended to build upon their existing RepoClear franchise, the new EM clearing service has not been implemented.