Central Counterparty Clearing for OTC Derivatives

Date:	July 2010
Author:	Sarah-Jane Dennis and David Reynolds

In the aftermath of the recent financial crisis, the continued growth in Over The Counter (OTC) derivatives volumes has highlighted the need to guard against the systemic risks (eg the risk of a default of one firm spreading through the financial system) that result from the failure of a major market counterparty.

OTC Central Counterparty Clearing has been proposed as a way to establish this guard.

Central Counterparty Clearing for OTC derivatives is a hot topic against a backdrop of developing, but as yet to be enforced, regulation.

This report, chosen by Intelligence member firms, takes a detailed look at Central Counterparty Clearing and addresses:

• The nature and challenges of the OTC market.
• The target model for central clearing and its issues.
• The local and global challenges faced by regulators in striving towards a common approach to eligibility and cracking inter-operability.
• Investment manager’s perspectives; the thirst for knowledge as to what peers and service providers are doing.

Finally, the report explores the implications and benefits for investment managers and their providers.

Table of contents

1	Management Summary	3
2	Introduction	5
2.1	Objectives and scope of the research	6
2.2	Definition of terms	7
2.3	Methodology	8
3	The Profile of Counterparty Clearing	10
3.1	Over the Counter (OTC) derivatives market	11
3.2	Why are we talking about this now?	15
3.3	Profile within investment managers	18
3.4	Profile within service providers	20
3.5	Counterparty clearing model	21
3.6	Standardisation and eligible instruments	24
4	Drivers	26
4.1	Risk	27
4.2	Regulation	31
4.3	Commercial	35
4.4	Other drivers	36
5	Clearers, Clearing Members and Concentration	38
5.1	The shape of the market – clearers and clearing members	39
5.2	Interoperability	40
5.3	Consolidation – an historic trend	44
6	The Buy-side Perspective	45
6.1	Triggers	46
6.2	Implications for investment managers	47
6.3	Waiting for regulation to come	49
7	The Service Provider’s Perspective	50
7.1	Implications	51
8	Conclusion	53

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