Centralized clearing for over‐the‐counter derivatives

Gordon Rausser, William Balson and Reid Stevens

Journal of Financial Economic Policy, 2010, vol. 2, issue 4, 346-359

Abstract: Purpose - Systemic risk propagated through over‐the‐counter (OTC) derivatives can best be managed by a public‐private central counterparty clearing house. The purpose of this paper is to outline the market microstructure necessary for such a clearing house. Design/methodology/approach - The paper proposes using an request for quote platform with an active permissioning system that uses analytic approximations based on Monte Carlo simulation to estimate default risk and a two‐part pricing scheme to efficiently price that risk. Findings - It is found that comprehensive clearing for complex and standardized derivatives is feasible using the clearing framework. Research limitations/implications - This research is limited by the authors' ability to give empirical examples. The paper gives a short example with data, but given the constraints on length, cannot go into more detail. Practical implications - This comprehensive clearing structure, in contrast to current proposed government regulations, will not drive out the “good” with the “bad” OTC derivative instruments. Originality/value - This is the only paper the authors are aware of that outlines a detailed framework for clearing all OTC derivatives.

Keywords: United States of America; Legislation; Financial risk; Derivative markets; Risk management (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Centralized Clearing for Over-the-Counter Derivatives (2009)
Working Paper: Centralized Clearing for Over-the-Counter Derivatives (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfeppp:v:2:y:2010:i:4:p:346-359

DOI: 10.1108/17576381011100865

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