Currently there are four categories in OTC derivatives according to their stages of central clearing history:
For a product to be centrally cleared, the contract should be standardized, need to be easily valued & should be liquid.
Only clearing members can transact with CCP. Requirements for becoming a member includes:
NUMBER OF CCPs:
Although a single large CCP can benefit from economies of scale, it is not feasible to have a single CCP because:
TYPES OF CCPs
Utility Driven Profit Driven
CCPs have systemic risk & its failure can lead to catastrophic events. Therefore, it must maintain sufficient loss absorption methods to withhold large member defaults.
Margining involves posting cash or marketable security collateral by the member.
The legal process of interposing the CCP between seller & the buyer is called Novation. Through novation, one contract is replaced with another contract with the CCP.
When trades are novated to a CCP, these redundant trades become a single net obligation between each participant & the CCP. This process is called multilateral offsetting or netting. Netting reduces total risk & minimizes the potential of a domino effect stemming from the default of a participant.
BILATERAL OTC MARKET
NOVATION TO CCP
Powered by BetterDocs
Create a new account
Number of items in cart: 0
Enter the destination URL
Or link to existing content