ISDA release paper on the Economics of Central Clearing (by the Streetwise Professor)


ISDA has just released a discussion paper called “The Economics of Central Clearing: Theory and Practice“, written by the Streetwise Professor

I have a lot of time for the prof, so I am sure the paper will be worth the read!

The paper points out both the benefits and potential issues related to central counterparty clearing facilities (CCPs). Several of its more important conclusions include:

  • CCPs can successfully reduce and reallocate counterparty risk through rigorous preparation for, and management of, member defaults;
  • CCPs can also create systemic risk, and it is imperative they have strong and conservative risk management and sufficient financial resources to withstand stressed markets. They also require close supervision by regulators;
  • The margin policies of CCPs can pose risks to the efficient functioning of the financial system. Mandatory clearing of OTC derivatives will lead to a large amount of liquidity being tied up as margin at CCPs. Increases in margin requirements by CCPs during a crisis could be destabilizing;
  • CCPs should generally align control, governance and membership requirements with the interests of participants that absorb their risks and share their losses.

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