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Webcast: Central Counterparties and Mandatory Clearing of OTC Derivatives

Speaker: Dr Jon Gregory

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A course on this topic is available in London Time Zone, Singapore Time Zone and New York Time Zone

Webcast Agenda

  • Regulatory Reform and OTC Derivatives 
  • The Mechanics of Central Clearing 
  • The Impact and Risks of OTC Clearing 


1. Who will get the interest paid on the (initial) margin?
A. CCPs pay a relatively low interest rate on initial margin (e.g. OIS – 25 bps). For clients, clearing members will likely pass on the interest possibly with some further spread reduction.

2. How can Banks capitalize against Default Fund loss risk in the presence of multiple CCPs. If bank capitalize against each CCP in isolation it would be expensive and may not necessarily capture the big picture.
A. In the Basel capital requirements there is a clear wish to capitalise default fund contributions heavily because it is envisages that they will be hit only during a time of extreme stress. This is why there is a potential risk weight of 1250%. For the same logic, I would imagine regulators would expect the default fund at multiple CCPs to be potentially hit at the same time and therefore capitalising in isolation would be appropriate.

3. Are CCP subjected to similar intensive capital requirement like banks, to cover an event of default?
A. There are requirements over their initial margin methodologies and size of their default fund but they are not very prescriptive and not as rigorous as the capital requirements, stress testing etc that banks are currently expected to comply with.

4. Who has to centrally clear transactions and would you even clear voluntarily?
A. Generally “end-users” are exempt from clearing transactions. The definition of end-user depends partly on jurisdiction but would include corporates, sovereigns and potentially small financial institutions. FX trades are also broadly speaking exempt from the clearing mandate. An entity may clear voluntarily as they might see the costs as being favourable but this will depend on many factors. Banks may also voluntarily “back-load” transactions to gain netting benefits.

5. How would you decide whether or not to be a member of a CCP?
A. There are certain operational requirements from being a CCP member such as conforming to margin requirements and participating in the “default management process”. The latter is a clear reason why many financial institutions would not be members on the basis of not being able to bid in the auction.

6. Are CCPs too big to fail?
A. Yes, the global CCPs clearing OTC derivatives will likely be too-big-to-fail and arguably even more systemically important than the large banks.

Thank you to those attendees who submitted their questions.

LFS offers 'Bilateral Margin Requirements, ISDA SIMM and Central Clearing' programme with Dr Jon Gregory in London.

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