The release of the European Markets Infrastructure Regulation consultation paper in Europe two weeks ago and the expected signing of the Financial Reform Bill in the U.S., mean central clearing for many OTC derivatives and cash financial instruments will soon become part of the trading landscape.
The Upside Of The CCP
By the legal process of novation or open offer, a central counterparty stands as counterparty to two matching trades from market participants. This guarantees delivery and payment and replaces the counterparty risk that either is subject to with mutualised CCP guarantees. As the CCP takes on this risk, it uses sophisticated risk management tools enabling access to adequate funds to cover potential defaults. Generally, these funds, in order of access to cover a default are: initial and variation margin deposits sent by the clearing member to the exchange; the defaulting member's performance funds; the CCP's own capital; and, ....