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Financial Stability Paper No 14: Thoughts on determining central clearing eligibility of OTC derivatives

Author

Listed:
  • Sidanius, Che

    (Bank of England)

  • Wetherilt, Anne

    (Bank of England)

Abstract

In response to the events of 2007–09, the G20 has mandated a comprehensive reform of the structure and transparency of over-the-counter (OTC) derivatives markets, which will result insignificant changes in the trading, clearing and reporting of transactions. This article explains whichcriteria are important when determining the eligibility for central clearing of OTC derivativesproducts. Suitability for mandatory central clearing is likely to depend on product and processstandardisation, but also on market liquidity. Liquidity is an important constraint and may requirecentral counterparties (CCPs) to modify risk management models. Further, systemic risk reductionbenefits associated with central clearing can only be achieved when CCPs have robust riskmanagement processes. Novation to CCPs is unlikely to be practical where operational processesare not automated, while risk modelling and default management become particularly challengingwhen products are illiquid. Therefore, there may be a natural boundary for the central clearingobligation, with less liquid products, or products for which operational process remain bespoke andless-automated, unlikely to be suitable for a central clearing obligation.​

Suggested Citation

  • Sidanius, Che & Wetherilt, Anne, 2012. "Financial Stability Paper No 14: Thoughts on determining central clearing eligibility of OTC derivatives," Bank of England Financial Stability Papers 14, Bank of England.
    • Handle: RePEc:boe:finsta:0014
    Note: http://www.bankofengland.co.uk/financialstability/Pages/fpc/fspapers/fs_paper14.aspx
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    File URL: https://www.bankofengland.co.uk/-/media/boe/files/financial-stability-paper/2012/thoughts-on-determining-central-clearing-eligibility-of-otc-derivatives
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    References listed on IDEAS

    as
    1. Smyth, Nick & Wetherilt, Anne, 2011. "Trading models and liquidity provision in OTC derivatives markets," Bank of England Quarterly Bulletin, Bank of England, vol. 51(4), pages 331-340.
    2. Daniel Heller & Nicholas Vause, 2011. "Expansion of central clearing," BIS Quarterly Review, Bank for International Settlements, June.
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    Cited by:

    1. Sidanius, Che & Zikes, Filip, 2012. "Financial Stability Paper No 18: OTC derivatives reform and collateral demand impact," Bank of England Financial Stability Papers 18, Bank of England.

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    More about this item

    Keywords

    Derivatives; bank regulation;

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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