LCH.Clearnet OTC role vs clearing for an Exchange

Discussion in 'SA5' started by Edwin, Apr 7, 2015.

  1. Edwin

    Edwin Member

    Am I right in concluding that the role of a clearing house in the OTC markets (novation, netting, margining etc) is the same as the role it assumes when clearing for an exchange.

    In this way the advantages and disadvantages of OTC clearing (say LCH clearing OTC Interest rate Swaps) as well as the general role of CCP - OTC will be exactly the same as when clearing trades for an exchange (say LCH for LIFFE)?
     
  2. Colin McKee

    Colin McKee ActEd Tutor Staff Member

    My feeling is that this is correct. There may be someone that works closely in this area who can add something here though.??
     
  3. Edwin

    Edwin Member

    Finally able to write down a small summary for CCPs;-

    1) Central clearing - also allows non-members via client clearing i.e. can access as clients of clearing members
    2) Multilateral Netting
    3) Novation
    4) Margining or collateral system

    Default Management

    1) Default Waterfall
    2) CCP mutualises losses via default fund
    3) Ask for additional collateral if fund exhausted
    4) Taps its own equity
    5) Auction process
    6) Tear up contracts - that is, to cancel contracts (but to compensate for this via a ‘cash sum’ payable from one party to another)

    Risks

    1) Systemic impact of CCP failure
    2) Asking for additional collateral if fund exhausted by increasing margins during periods of stress - when financial markets may be illiquid and credit conditions are tight, the members may be forced into liquidating positions
    3) Auction process may fail, again more likely during periods of stress

    Ask me why I am obsessed with getting it right
     
  4. Colin McKee

    Colin McKee ActEd Tutor Staff Member

    Useful stuff, for a topic that seems quite likely to come up at some point. thanks
     

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