Central counterparty clearing house

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A topic of great interest to you if your interests lie in things like European Markets Infrastructure Regulation (EU Regulation 648/2012 (EUR Lex)).

"By and large, derivatives are traded in OTC markets, where dealers trade bilaterally with each other and with clients. If those market participants do not use a central counterparty (CCP), this exposes both parties to bilateral counterparty credit risk, in particular when derivatives positions are held over long maturities. These exposures are significant: the aggregate credit exposure related to derivative holdings for the top five US banks has been estimated to be over US$1 trillion. Transparency in these markets is generally low, so it is difficult to know the exact nature of counterparty credit exposures at both the individual and the global level. During the 2007–09 financial crisis, lack of transparency, combined with increased concerns about counterparty credit risk led to a significant reduction in liquidity."

- Thoughts on determining central clearing eligibility of OTC derivatives - Bank of England Financial Stability Paper no. 14 - March 2012.

Summary

• G20 Mandate: In September 2009, the G20 leaders agreed in Pittsburgh that, by end-2012, all standardised OTC derivative contracts be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties.
• Regulatory Backing:
  • US: In the United States, the central clearing reforms are being implemented as part of the Dodd-Frank Act, with the Commodities Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) in charge of rule making.
  • Europe:In Europe this is part of the European Market Infrastructure Regulation (EMIR) process led by the European Commission.
• Timing: G20 Mandated that all standardised OTC derivative contracts be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by the end of 2012. There have been delays in both rule making and implementation across G20 jurisdictions. many jurisdictions have not yet fully defined the nature of either the central clearing or the trading obligation — which products are in scope; which factors will be used to determine the scope.

See also

• 306(1) - regulatory capital treatment for CCPs under Capital Requirements Regulation 575/2013 (EUR Lex)).