Central Counterparties

Practical guidance toward handling the latest changes to the OTC
derivatives market

Central Counterparties is a practical guide to central
clearing and bilateral margin requirements, from one of the
industry's most influential credit practitioners. With up-to-date
information on the latest regulations imposed after the global
financial crisis, this book covers the mechanics of the clearing
process and analyses the resulting consequences. Detailed
discussion explains the ways in which the very significant clearing
and margining rules will affect the OTC derivatives market and the
financial markets in general, with practical guidance toward
implementation and how to handle the potential consequences.

Over-the-counter derivatives were blamed by many for playing a
major role in the 2007 financial crisis, resulting in a significant
attention and dramatic action by policymakers, politicians, and
regulators to reduce counterparty credit risk which was seen as a
major issue in the crisis. The two most important regulatory
changes are the mandatory clearing of standardised OTC derivatives,
and the requirements for bilateral margin posting in non-standard
OTC contracts. Central Counterparties is a complete
reference guide to navigating these changes, providing
clarification and practical advice.

• Review the mitigation of counterparty credit risk with the
  historical development of central clearing

• Clarify the latest regulatory requirements imposed by
  Dodd-Frank, EMIR, Basel III and more

• Learn the mechanics of central clearing, with special attention
  to complex issues such as margin calculations, the loss waterfall,
  client clearing and regulatory capital rules

• Gain insight into the advantages and disadvantages of clearing
  and bilateral margin requirements, and the potential issues that
  arise

As the clearing and margining mandates are phased in, the
associated costs will be severe enough to dramatically shift the
topology of the financial markets and transform the nature of risk.
Central Counterparties provides the information,
clarification and expert insight market practitioners need to get
up to speed quickly.

Autorentext

DR JON GREGORY is a partner at Solum Financial Partners LLP and specialises in counterparty risk and CVA related consulting and advisory projects. He has worked on many aspects of credit risk in his career, being previously with Barclays Capital, BNP Paribas and Citigroup. He is author of the book Counterparty Credit Risk and Credit Value Adjustment: A Continuing Challenge for Global Financial Markets Second Edition. Jon holds a PhD from Cambridge University.

Klappentext

Central Counterparties

Mandatory Clearing and Bilateral Margin Requirements for OTC Derivatives The Global Financial Crisis, from 2007 onwards, illustrated the inherent weaknesses in the global financial system and some of their causes. In particular over-the-counter (OTC) derivatives were blamed by many for partially causing and catalysing the crisis. Not surprisingly, this has led to dramatic action from politicians, policymakers and regulators in relation to OTC derivative markets. Two of the most important changes are the mandatory clearing of standardised OTC derivatives and the requirements for bilateral margin posting in non-standard OTC contracts. Both clearing and margining mandates will be effectively phased in from 2014 and the associated costs will be severe. These regulatory changes are therefore going to create a dramatic shift in the topology of financial markets, together with a significant reallocation of counterparty and systemic risks. Knowledge of the subject is an important consideration for all financial institutions whether they are CCP members, clear trades indirectly or find themselves subject to bilateral margin requirements. Central Counterparties: Mandatory Clearing and Bilateral Margin Requirements for OTC Derivatives explains the central clearing of OTC derivatives and the associated bilateral margin requirements. The book provides a historical perspective of central clearing as it developed with derivative exchanges in order to mitigate counterparty credit risk. The regulatory requirements (Dodd-Frank, EMIR, Basel III) being imposed since the global financial crisis are defined and discussed. The mechanics of central clearing are described including operational aspects, initial margin and default fund calculations, loss waterfalls and allocation methods. Client clearing is discussed, in particular giving detail on margin segregation and portability methods. An assessment is made throughout of the advantages and disadvantages of clearing and margining requirements, including potential issues such as funding liquidity risk, operational risk and wrong-way risk. The book is unique and covers the regulatory requirements together with the practical implementation details and the potential impacts and consequences. It is an invaluable and complete reference guide for any market practitioner, policy maker, academic or student with responsibility or interest in the area of OTC derivatives.

Zusammenfassung
Practical guidance toward handling the latest changes to the OTC derivatives market Central Counterparties is a practical guide to central clearing and bilateral margin requirements, from one of the industry's most influential credit practitioners. With up-to-date information on the latest regulations imposed after the global financial crisis, this book covers the mechanics of the clearing process and analyses the resulting consequences. Detailed discussion explains the ways in which the very significant clearing and margining rules will affect the OTC derivatives market and the financial markets in general, with practical guidance toward implementation and how to handle the potential consequences.

Over-the-counter derivatives were blamed by many for playing a major role in the 2007 financial crisis, resulting in a significant attention and dramatic action by policymakers, politicians, and regulators to reduce counterparty credit risk which was seen as a major issue in the crisis. The two most important regulatory changes are the mandatory clearing of standardised OTC derivatives, and the requirements for bilateral margin posting in non-standard OTC contracts. Central Counterparties is a complete reference guide to navigating these changes, providing clarification and practical advice.

• Review the mitigation of counterparty credit risk with the historical development of central clearing
• Clarify the latest regulatory requirements imposed by Dodd-Frank, EMIR, Basel III and more
• Learn the mechanics of central clearing, with special attention to complex issues such as margin calculations, the loss waterfall, client clearing and regulatory capital rules
• Gain insight into the advantages and disadvantages of clearing and bilateral margin requirements, and the potential issues that arise
  As the clearing and margining mandates are phased in, the associated costs will be severe enough to dramatically shift the topology of the financial markets and transform the nature of risk. Central Counterparties provides the information, clarification and expert insight market practitioners need to get up to speed quickly.

Inhalt

Acknowledgements xv

Part I: Background 1

1 Introduction 3

1.1 The crisis 3

1.2 The move towards central clearing 4

1.3 What is a CCP? 6

1.4 Initial margins 7

1.5 Possible drawbacks 8

1.6 Clearing in context 9

2 Exchanges, OTC Derivatives, DPCs and SPVs 11

2.1 Exchanges 11

2.1.1 What is an exchange? 11

2.1.2 The need for clearing 12

2.1.3 Direct clearing 12

2.1.4 Clearing rings 13

2.1.5 Complete clearing 14

2.2 OTC derivatives 16

2.2.1 OTC vs. exch…