By Jon Gregory

Practical suggestions towards dealing with the newest adjustments to the OTC derivatives market

Central Counterparties is a pragmatic consultant to significant clearing and bilateral margin necessities, from one of many industry's such a lot influential credits practitioners. With up to date details at the most modern laws imposed after the worldwide monetary main issue, this publication covers the mechanics of the clearing method and analyses the ensuing effects. particular dialogue explains the ways that the very major clearing and margining ideas will have an effect on the OTC derivatives industry and the monetary markets typically, with functional tips towards implementation and the way to address the capability consequences.

Over-the-counter derivatives have been blamed through many for enjoying an immense position within the 2007 monetary predicament, leading to an important cognizance and dramatic motion via policymakers, politicians, and regulators to minimize counterparty credits hazard which was once noticeable as an incredible factor within the quandary. the 2 most crucial regulatory adjustments are the required clearing of standardised OTC derivatives, and the necessities for bilateral margin posting in non-standard OTC contracts. Central Counterparties is an entire reference advisor to navigating those alterations, offering explanation and functional advice.

  • Review the mitigation of counterparty credits possibility with the historic improvement of valuable clearing
  • Clarify the most recent regulatory standards imposed through Dodd-Frank, EMIR, Basel III and more
  • Learn the mechanics of valuable clearing, with detailed cognizance to advanced matters corresponding to margin calculations, the loss waterfall, customer clearing and regulatory capital rules
  • Gain perception into the benefits and drawbacks of clearing and bilateral margin necessities, and the aptitude matters that arise

As the clearing and margining mandates are phased in, the linked bills may be serious sufficient to dramatically shift the topology of the monetary markets and rework the character of danger. Central Counterparties offers the data, explanation and professional perception industry practitioners have to wake up to hurry speedy.

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Additional info for Central Counterparties: Mandatory Central Clearing and Initial Margin Requirements for OTC Derivatives

Example text

In 2008, AIG was bailed out by the US government to the tune of approximately US$182 billion (the reason why AIG was bailed out and the monoline insurers were not was the size of AIG’s exposures12 and the timing of their problems close to the Lehman Brothers bankruptcy). These failures were due to a subtle combination of rating downgrades, required margin postings and mark-to-market losses leading to a downwards spiral. Many banks found themselves heavily exposed to monolines due to the massive increase in the value of the protection they had purchased.

This was to help market participants reduce counterparty risk and benefit from the fungibility that central clearing creates. These OTC transactions are still negotiated privately and off-exchange but are then novated into a CCP on a post-trade basis. Clearnet set up two OTC CCPs to clear and settle repurchase agreements (RepoClear) and plain vanilla interest rate swaps (SwapClear). Commercial interest in OTCcleared derivatives grew substantially in the energy derivatives market following the bankruptcy of Enron in late 2001.

2 for more detailed analysis. g. interest rate swaps) make up such a large proportion of the total outstanding notional. Although clearing is being extended to cover new products, this is a slow process since a product needs to have a number of features before it is clearable. For a transaction to be centrally cleared, the following conditions are generally important: Standardisation: Legal and economic terms must be standard since clearing involves contractual responsibility for cashflows. Complexity: Only vanilla (or non-exotic) transactions can be cleared as they need to be relatively easily and robustly valued on a timely basis to support variation margin calculation.

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Central Counterparties: Mandatory Central Clearing and by Jon Gregory
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