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Financial Stability Paper No 14: Thoughts on determining central clearing eligibility of OTC derivatives

Che Sidanius and Anne Wetherilt
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Che Sidanius: Bank of England, Postal: Publications Group Bank of England Threadneedle Street London EC2R 8AH

No 14, Bank of England Financial Stability Papers from Bank of England

Abstract: In response to the events of 2007–09, the G20 has mandated a comprehensive reform of the structure and transparency of over-the-counter (OTC) derivatives markets, which will result insignificant changes in the trading, clearing and reporting of transactions. This article explains whichcriteria are important when determining the eligibility for central clearing of OTC derivativesproducts. Suitability for mandatory central clearing is likely to depend on product and processstandardisation, but also on market liquidity. Liquidity is an important constraint and may requirecentral counterparties (CCPs) to modify risk management models. Further, systemic risk reductionbenefits associated with central clearing can only be achieved when CCPs have robust riskmanagement processes. Novation to CCPs is unlikely to be practical where operational processesare not automated, while risk modelling and default management become particularly challengingwhen products are illiquid. Therefore, there may be a natural boundary for the central clearingobligation, with less liquid products, or products for which operational process remain bespoke andless-automated, unlikely to be suitable for a central clearing obligation.​

Keywords: Derivatives; bank regulation (search for similar items in EconPapers)
JEL-codes: G15 G28 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2012-03-26
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