Launched on March 21, 2011 with 10 clearing member firms, New York Portfolio Clearing (NYPC) – a joint venture of The Depository Trust & Clearing Corporation (DTCC) and NYSE Euronext – clears U.S. interest rate futures and cross-margins such positions against fixed income cash instruments through DTCC’s subsidiary, the Fixed Income Clearing Corporation (FICC). Ira J. Krulik, chief operating officer of NYPC spoke this week with JLN Managing Editor Christine Nielsen. He shared what he believes are the advantages of NYPC’s risk management, “one-pot” cross-margining and clearance operations and its settlement efficiencies, in addition to his thoughts on where the NYPC may be headed from here.
Q: How did you come to be at the NYPC?
Ira Krulik: After over 30 years in the futures industry, I was approached at the 2010 annual Futures Industry Association (FIA) conference about my interest in the new venture. Once I understood who the parent organizations were and what they were planning to do, the concept became more intriguing. They were giving clients additional choice in the marketplace with a real value-add attached. Upon returning from the conference, I had the opportunity to meet with Walt Lukken, who had recently been named CEO of NYPC; but I spoke with my most important counsel, Mrs. Krulik, about the opportunity and she said, ‘Go for it!’
Q: You act as a direct link between NYPC and the banks and broker-dealers that are clearing through it. What type of feedback have you gotten so far from these market users?
Krulik: A lot is off-the-charts positive. Any competition in the marketplace is positive as it brings efficiencies … Clients now have real choice as to where to do business…and this drives innovation. This is evidenced by our open interest and clearing volumes, which are exceeding our initial expectations.
The entire delivery process is another thing that a lot of the firms are eager to get started with given the operational efficiencies it brings to the process, coupled with the cost savings it generates. The NYPC process mitigates the default risk associated with delivery by moving the physical delivery of the cash component of an interest rate futures transaction from NYPC over to FICC via the seamless “locked-in trade” process. Basically, once a short firm has advised of its intention to deliver securities, and once it has indicated the CUSIP that it will deliver, NYPC, on behalf of the firm, will pass a “locked-in trade” over to FICC. FICC will include the trade NYPC sends to it on behalf of the firm with all of the trades (for the same CUSIP) that the firm clears with FICC on that day. Thus, all of this activity is netted and the firm only needs to settle on the net exposure with FICC. By doing this, firms no longer need to “box” deliverable securities the night prior to delivery date to insure that actual delivery takes place, and, consequently, firms no longer need to absorb the financing costs for that day.
Q: What do you feel is the biggest challenge for NYPC as a new derivatives clearing organization? What do you feel is the organization’s biggest strength?
Krulik: The challenge is for the external world to find out who we are and what we do. Because the value proposition is in the “one-pot” margin process, we’ve been reaching out to firms that we believe are the biggest traders in the fixed income space and signing them up.
There are 11 approved clearing members with several more in the pipeline. It is our hope to be at 20 firms plus by the end of the summer.
In terms of strengths, clearly it’s the efficiencies we are bringing to the marketplace. Being able to bring the cash positions and futures into one pot, and calculating a single margin call / exposure, is a win for the regulators and a win for the firms because it allows the clearinghouses and regulators to view common members’ positions cleared at NYPC and FICC in total and, therefore, it is a truer representation of the risk and thus the capital (margin) needed to maintain that risk. NYPC’s one-pot model also allows firms to settle with NYPC and FICC in a single call with a single cash movement, reducing the number of banking transactions to accomplish the same operational requirement.
Q: Could you tell me a little about NYPC’s locked-in delivery mechanism? This is something of an untold story of the NYPC?
Krulik: It’s a much more seamless process than is currently in the marketplace.
[**CN: NYPC materials indicate that in today’s futures markets, only a very small percentage of the open interest actually goes to delivery, mainly as a result of the operational burdens placed on the clearing member responsible for making or taking delivery. Through the use of FICC’s Real Time Trade Matching system, NYPC eliminates these operational burdens and offers member firms an efficient, straight-through delivery process for U.S. Treasury futures. Contracts remaining open after the close of trading on the last trading day of the delivery month will be automatically submitted as FICC locked-in trades in the underlying U.S. Treasury securities eligible for settlement on a delivery vs. payment (DVP) basis on the next business day.]
Q: You are a former president of the Futures Services division of the FIA and a current board director of the FIA’s Chicago Operations division and its Futures Services division. What do you feel has been your greatest accomplishment as part of that organization?
Krulik: When I was president, many operational efficiencies were created that the entire industry was able to benefit from. For example, an upgrade to the eGAINS process was finalized, which including adding more regional exchanges to this process, and the eGUS application was created.
[**CN: In its simplest form, eGAINS is a system – created a little over 10 years ago – that nets the fees that broker-dealers have to share with each other when they split the clearing and execution functions of a derivatives trade. A trader can execute a trade with one firm and clear it with the other. The clearing firm collects all of the fees and then pays the executing firm for its role. At the end of a trading day, the firms will have lots of fees to exchange. eGAINS allows them to do this all at once (netting the trades) rather than individually. Although this process was initially created by one exchange/clearinghouse, we were able to take this process and expand it to other regional exchanges to foster the efficiencies it developed. Krulik was also involved with the implementation of eGUS, an electronic give-up documentation system.]
Q: How do you feel the industry will evolve in coming years? How will NYPC fit into this landscape? As time goes on, what role might you play?
Krulik: Being a futures person for as long as I have been, cutting my teeth with the silver crisis of the early 80’s, I have been fortunate to witness – first hand – the innovations in futures execution and clearing, such as new products, i.e. options on futures which were launched in the early 80’s, to new asset classes, i.e. equity index futures, Eurodollar futures, etc., and new efficiency processes, i.e. eGAINS and eGUS as discussed above. It is clear to me that as needs continue to change, this industry will continue to evolve to meet those needs.
The concept of NYPC began in 2009, predating the Dodd-Frank legislation. Shortly after the 2008 financial crisis, NYSE Liffe US and DTCC began having many of the same risk management discussions that arose out of the Dodd-Frank legislative process, and those discussions became the seeds that created NYPC. NYPC fits into the ongoing evolution of the futures and derivatives industry with its innovative way of looking at risk. We will continue to add to this evolution as we continue to add products to the “one-pot” process. In particular, we hope to add options on futures by the end of this year.
I hope to continue to be instrumental in this effort by helping to direct NYPC’s efforts to add new products, new processes and be at the forefront of the regulatory changes that impact derivative clearing organizations.