This white paper, the first in a three-part series commissioned by Equinix, provides a guide to the evolving clearing landscape OTC derivatives.
The OTC derivatives markets are going through a period of significant change as a result of the post-crisis global regulatory overhaul, which is forcing these instruments to be traded on a regulated market (i.e., trading venue) and cleared via clearing central counterparties. Central clearing is the process in which financial transactions are cleared by a single CCP to reduce the counterparty risk between the two parties to a trade. Each party in the transaction enters into a contract with the CCP, so each party does not take on the risk of the other defaulting. It is this reduction in counterparty risk that regulators are keen to introduce in the world of bilaterally agreed and traditionally opaque OTC derivatives.
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The clearing of OTC IRSs, OTC CDSs, and other similar instruments via a clearinghouse or CCP is nothing new—these services have been on the market for some time, albeit offered by a limited number of clearers. The regulatory mandate to clear as part of the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), EMIR, and equivalent regulations in numerous other domestic markets, however, is causing a seismic shift in the global competitive landscape.
In order to meet the expected rise in clearing volume driven by regulation, an influx of new CCPs is expected in markets that already offer OTC derivatives clearing. Current dominant players are therefore likely to come under pressure to retain their market share. Domestic markets such as Chile and China that have not previously featured such services have seen moves by local players to begin down the road toward supporting OTC derivatives clearing. In the meantime, the rest of the world can look to the U.S. market as a precedent for how the clearing space is likely to be altered by regulatory changes.
This white paper, the first in a three-part series commissioned by Equinix, provides a guide to the evolving clearing landscape for OTC derivatives, highlighting the following:
- The list of current and planned CCPs across the globe
- Traditional levels of OTC derivatives clearing volume in the markets that currently support these services
- A timeline of recent and incoming regulatory changes in the United States and Europe, highlighting key differences between the jurisdictions
- An examination of the impact of Dodd-Frank Act requirements on clearing volume in the U.S. OTC derivatives markets as a precedent for the rest of the world
Aite Group gathered data in Q3 2013 from the clearinghouses and CCPs that currently clear OTC derivatives transactions across the globe and those that have announced they are planning to set up such operations in the next two or three years. Clearers were asked to provide clearing volume data for the last two years (where available) and detail their roadmaps to add further capabilities in the near term. Outreach included CCPs from key regions such as North America, Europe, Asia-Pacific, Africa, and Latin America.
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