OTC Client Clearing – new market

OTC Client Clearing – new market
Posted on July 11, 2013 by Ravikanth Borra
With the new regulations, clearing is mandatory for OTC derivatives. Not every bank and financial and non-financial institution will become direct member of CCP clearing house because of high fees (default fund fees). So the small banks and financial/non financial participants in OTC market will be looking out and will opt for Clearing Member/Bank who will provide OTC Clearing as service, without the high membership fees.

Ultimately the banks will be looking for clearing members who can help them sail through the regulations, and not let them bother with all the additional rules. They are not looking for price arbitration, or choose a product off the shelf. Clients are buying something that is brand new and they want to know how it works, how the regulatory environment is changing, and how they’ll be affected

Thus Client clearing the new business is born, which is provided by big banks who are direct members of clearing house and who will be providing OTC clearing as service. As of today the market is in its very early stages. There is only probably max 10 firms in Europe who has the capability to provide client clearing service, but this number will grow, how large, depends on the market.

The OTC derivatives market is clearly very big (in trillions or more) and the margin requirements (will be in billions) if have to be met, the required collateral margin acceptable by CCP i.e cash/treasury if has to match with the market size will be very difficult. This will add a very tight squeeze on liquid cash available in the market to the extent that market can no longer function.

This is where the client clearing can come to help. The clearing members can be more lenient than the CCP in terms of acceptable collateral. Also clearing members can theoretically reduce the margin needs by cross netting the cleared and uncleared products. This market is very much still on paper and will be driven by the regulatory needs and the market reaction

The regulations are put on to standardize the OTC markets. The size of market dictates that all the regulations could not be implemented as desired, so either the size of market has to reduce or the market itself should find ways which is the usual case.

Client clearing market can help the OTC market to find a way to implement the regulations and at the same time allow the market to function in its operative ways. Well this is still starting and so wait and watch .

Cross-product margining arrangements

Clearing members could also charge clients less than the CCP’s minimum – an area in which some dealers are hoping to put clear water between themselves and the competition. Although CCPs will break-up offsets between cleared and uncleared products, some dealers promise to continue calculating client margin as though cross-product netting was still achievable.

There could be offsets across cleared products and uncleared products done bilaterally where the clearing broker is also acting as prime broker on bilateral trade. This is possible theoretically and so wait until market dictates the needs.

As the competition heats up over the days, probably there would be difference in the views from European banks and non European (US/Japanese). The European banks are known to conservative in their approach, and US banks may come up with new and interesting products/services.

Collateral for Margin
One more aspect where clearing brokers can help is if the clients dont have the right kind of assets required by CCP to be posted for Initial Margin purposes, probably clearing member can be more lenient, to allow collateral other than cash/government bonds.

Eurex Clearing said it launched Eurex Clearing Prisma, a risk management system that applies a portfolio methodology

Eurex Clearing said it launched Eurex Clearing Prisma, a risk management system that applies a portfolio methodology


Frankfurt – Eurex Clearing said it launched Eurex Clearing Prisma, a risk management system that applies a portfolio methodology.

The new system will be rolled out for all products cleared by Eurex Clearing and will replace the current Risk Based Margining methodology.

Eurex Clearing said that by capturing risk reducing portfolio effects, Prisma promotes hedged positions and increases capital efficiency.

“After full roll-out, Eurex Clearing will, as the first major clearing house, apply a single consistent methodology and system across all asset classes cleared including listed and OTC products and thereby increase operational efficiency,” the company said.

Eurex Clearing Prisma applies a simulation-based Value-at-Risk model which covers historical and hypothetical stress scenarios

Gaia Transparence position management software available for download in Alpha version

Gaia Transparence announces the release of an alpha version of its open source “Position Builder”. Two packages are available for download from the website; one package addressing IT and the other end user expectations. What Gaia Transparence Position Builder brings?

via Pocket http://www.bobsguide.com//guide/news/2013/Jun/10/gaia-transparence-position-management-software-available-for-download-in-alpha-version.html June 15, 2013 at 07:36PM

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