Friday, May 28, 2010

Design of financial clearinghouses: Over the counter derivatives markets

The Bank for International Settlements' Committee on Payment and Settlement Systems has, in a followup to the recent financial crisis, issued two reports.

The first concerns clearinghouses-- Central Counterparties (CCPs). Here is the summary, and the report. From the summary:

"Over the past several years, public and private sector entities have undertaken a coordinated effort to improve the post-trade infrastructure for OTC derivatives transactions. The recent financial crisis demonstrated the need to further enhance the safety and transparency in the OTC derivatives markets. As a result, authorities in many jurisdictions have set out several important policy initiatives encouraging greater use of CCPs for OTC derivatives markets. The CPSS and the Technical Committee of IOSCO support these positive developments.
A well designed CCP can reduce the risks and uncertainties faced by market participants and contribute to the goal of financial stability. Nevertheless, because of the complex risk characteristics and market design of OTC derivatives products, clearing them safely and efficiently through a CCP presents unique challenges that clearing listed or cash-market products may not. "

Some of the challenges seem to be in making the products well defined...

These apply also to Trade Repositories, which are meant to be simple registers of what positions are held. Again, here's the summary and the report.

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