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The mandatory requirement to use clearing houses for various OTC derivatives including interest rate swaps, credit defaults swaps and certain FX products could offer real benefits, according to Ben Broadley (pictured), a senior application engineer at Advent Software.

 

 

“It will enable the industry to mitigate counterparty risk, by removing exposure to individual brokers and because the clearing members will guarantee every transaction to the clearing houses,” Broadley says.
 
“It will also improve pricing and reduce the amount of documentation needed.” In addition, positions with a central counterparty could be subject to a lower capitalisation requirement than other positions under the Basel III rules.
 
However, centralised clearing is also likely to entail higher collateral management requirements, because of stricter initial margin calculations by clearing houses and more limited access to the benefit of cross-netting.
 
“Restrictions will also apply to acceptable collateral types through each CCP’s eligibility criteria, impacting collateral liquidity,” Broadley adds. “Possible solutions to this are to enter into asset transformation swaps, single currency funding agreements, or pre-paying services with your clearing broker.”

 


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