Clearing OTC Derivatives

Understanding today's and tomorrow's post trade environment

Course objectives

  • Understanding regulatory and technical issues of new OTC derivatives clearing framework
  • Mastering how OTC derivatives CCPs work
  • Being aware of coming changes in post-trade landscape

The Central CounterParty ( CCP or Clearing house) : the basics

  • Notion of the underlying legal contract

The CCP for cash markets

  • Listed contracts (commodities, securities)
  • Supervision by an external regulator

The CCP for futures markets

  • Standardised, listed contracts for future delivery
  • Rapid anonymous trading
  • Reduction in payment flows
  • Bilateral counterparty risk elimination
  • Price quotes for mark-to-market
  • Chicago SPAN
  • Correlations: calendar spreads, cross-product spreads

Over-The-Counter (OTC) derivatives CCPs

  • OTC Interest Rate Swaps
  • IRS products: linear and non-linear
  • Credit Default Swaps
  • Market participants: market makers, flow traders, end-users
  • Swap products that can and cannot be cleared
  • Indices and price sources
  • Legal foundations; ISDA
  • Definitions; FpML

Clearing outside the CCP

  • Bilateral and multilateral cross border netting
  • Credit Support Agreements, bilateral collateralisation
  • Netting sets
  • Contract novation
  • Prime brokerage

OTC CCP basic functionality

  • Protecting the clearing house
  • Direct members of the CCP
  • CCP registration of a trade
  • Cleared swaps workflow; life of a trade
  • The client (end-user or buy-side) and his Clearing Broker
  • Portfolio revals
  • Mark-to-Market Variation Margin
  • Interest rate curves; standardised approach
  • Initial Margin: Filtered historical simulation, VAR
  • CCP risk management
  • Default management
  • The default waterfall

Client Clearing

  • FCM model in the US ; European model
  • Collateral transformation:- Client to Clearing Broker to CCP
  • Costs to the client

CCP systemic risk

Regulatory framework for CCPs and their users

  • Basel I, II and III
  • The Dodd Frank act; EMIR; G20 regulator group; The DCO, the ROCH and successors
  • US GAAP versus IFRS
  • The implications of recent and upcoming regulation for OTC derivatives

Case study:

* Counterparty risk reduction

* RWA and reg Cap requirement reductions

* STP improvements

* Operational risk

OTC CCPs today

  • Products and counterparties
  • The mechanics

Case study: Comparative analysis of the main OTC CCPs, Clearing broker offerings

Tomorrow's OTC CCP landscape

  • Global, regional, national CCPs
  • Inter-operability
  • Future cleared products : limitations
  • Clearing versus CSAs
  • G20 regulator group : expected development
  • Dodd Frank: right or wrong?

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