How OTC to CCP clearing works: Difference between revisions
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===In a {{nutshell}}=== | ===In a {{nutshell}}=== | ||
Where parties wish to execute transactions | Where parties wish to execute [[OTC]] swap transactions which are subject to mandatory clearing they will execute a clearing agreement such as the FIA-[[ISDA]] [[Cleared Derivatives Execution Agreement]]. This can be an annex to their {{isdama}} or the the [[FIA]] terms of business. | ||
===How will mandatory OTC=>CCP clearing change things for in-scope swaps?=== | |||
===How will clearing change | The relationship between the {{ccp|end user}} and the {{ccp|dealer}} — currently memorialised in a {{isdaprov|Confirmation}} for a {{isdaprov|Transaction}} under an {{isdama}} — will continue, but the {{ccp|dealer}}, in its capacity as a {{ccp|clearing member}} of the {{ccp|clearinghouse}}, will act as a “[[clearing agent]]” for the {{ccp|end user}}. | ||
The | The {{isdaprov|Transaction}} between the {{ccp|end user}} and the {{ccp|clearing member}} will continue under a new customer agreement (which may be a modified {{isdama}}), but the {{isdaprov|Transaction}} will be subject to the {{ccp|clearinghouse}} rules. | ||
The {{ccp|clearinghouse}} now stands between the parties to a trade, effectively guaranteeing performance of each party’s obligations under that trade. | |||
==={{ccp|Agent}} or {{ccp|principal}}?=== | |||
[[Image:Ccp screenshot.jpg]] | [[Image:Ccp screenshot.jpg]] | ||
The {{ccp|clearing member}}’s capacity (as {{ccp|agent}} or {{ccp|principal}}) determines the structure of the {{ccp|cleared trade}}s. | |||
:'''Agent''': Where the {{ccp|clearing member}} | :'''Agent''': Where the {{ccp|clearing member}} is agent, the {{ccp|end user}} will face the {{ccp|clearinghouse}} directly because, although the {{ccp|clearing member}} may appear to be a party to the trade, it is not the true counterparty (here, there is just one transaction, albeit involving three parties). | ||
:'''Principal''': Where the {{ccp|clearing member}} acts as principal, the {{ccp|end user}} will face the {{ccp|clearing member}}, and the {{ccp|clearing member}} will face the {{ccp|clearinghouse}} (here, there are two identical | :'''Principal''': Where the {{ccp|clearing member}} acts as principal, the {{ccp|end user}} will face the {{ccp|clearing member}}, and the {{ccp|clearing member}} will face the {{ccp|clearinghouse}} (here, there are two identical “back-to-back” transactions among the three parties). | ||
The above diagram looks at the clearing process, from execution to settlement. (There are a number of different ways in which execution and clearing can be effected.) The {{ccp|end user}} (acting as a trader on its own account, or acting through a {{ccp|broker}}) enters into a trade with a market participant. That trade is then submitted by each party for clearing through its respective {{ccp|clearing member}}. When the trade is accepted for clearing, a give-up or novation of the original contract takes place through which the {{ccp|clearinghouse}} is substituted as the counterparty on both sides of the trade. | The above diagram looks at the clearing process, from execution to settlement. (There are a number of different ways in which execution and clearing can be effected.) The {{ccp|end user}} (acting as a trader on its own account, or acting through a {{ccp|broker}}) enters into a trade with a market participant. That trade is then submitted by each party for clearing through its respective {{ccp|clearing member}}. When the trade is accepted for clearing, a give-up or novation of the original contract takes place through which the {{ccp|clearinghouse}} is substituted as the counterparty on both sides of the trade. |