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Description Central Counterparties: Mandatory Central Clearing and Initial Margin Requirements for OTC Derivatives (The Wiley Finance Series) by Jon Gregory Language: English | Format: PDF | ISBN-10: 1118891511 | ISBN-13: 978-1118891513 Page count: 329 | Date Published: July 21, 2014 | Publisher: Wiley  Kindle eBooks, Business & Money, Finance CONTENTS Cover Title Page Copyright Page Contents Acknowledgements PART I: BACKGROUND PART II: COUNTERPARTY RISK, NETTING AND MARGIN PART III: STRUCTURE AND MECHANICS OF CLEARING PART IV: ANALYSIS OF THE IMPACT AND RISKS OF CENTRAL CLEARING Glossary References Index EULA Excerpt: In 2007, a US housing crisis led to a credit crisis, which caused the failures of large financial institutions and a severe economic downturn. The aftermath of the ‘global financial crisis’ (GFC) is still being felt across the general economy, and has led to significant changes in the functioning of financial markets and the way in which financial institutions are regulated. The GFC highlighted the importance of controlling risk in over-the-counter (OTC) derivatives to maintain global financial stability. Whilst OTC derivatives did not cause the GFC, they likely contributed to amplifying various problems and provided channels for systemic risk to propagate. A derivative trade is a contractual relationship that may be in force from a few days to sev- eral decades. During the lifetime of the contract, the two counterparties have claims against each other such as in the form of cashflows that evolve as a function of underlying assets and market conditions. Derivatives transactions create counterparty credit risk (counterparty risk) due to the risk of insolvency of one party. This counterparty risk in turn creates sys- temic risk due to derivatives trading volume being dominated by a relatively small number of large derivatives counterparties (‘dealers’) that are then key nodes of the financial system. Counterparty risk refers to the possibility that a counterparty may not meet its contractual requirements under the contract when they become due. Counterparty risk is managed over time through clearing: this can be performed bilaterally, where each counterparty manages the risk of the other, or centrally through a central counterparty (CCP). Historically, bilateral clearing is far more dominant for OTC derivatives. During the GFC, authorities had to make key decisions over large failing financial institutions such as Bear Stearns, Lehman Brothers, the Royal Bank of Scotland and AIG. These decisions were made with a very opaque view of the situation the firms were in and the potential knock-on impact of any choices made. One of the reasons for the opacity was the large volume of bilateral OTC derivatives contracts on the balance sheets of such large financial institutions. Bilateral OTC derivatives are essentially private contracts that may be illiquid and have non-standard or exotic features. A key concern over the global OTC derivatives market has always been systemic risk, which in this context refers to financial system instability exacerbated by the distress of financial institutions. In the context of the GFC, systemic risk arose due to the failure of large financial institutions and the resulting domino effects. Sharing Widget |