Cleared Derivatives are contracts executed OTC via phone or electronic interface (Swap Execution Facility or SEF), then submitted to a Central Counterpartty (CCP) for clearing and administration of cash flows and collateral.
In submitting the contract to a CCP the counterty credit risk is mitigated as the CCP is the counterparty to all transactions. Contrary to Bilateral Derivatives where two counterparties agree to terms and execute a contract and that contract is a private contract administered by each counterparties middle office.
Central Counterparty Clearing (Clearinghouses) are organizations of mutual risk. They mitigate the credit risk of each clearing member and provide several key administrative features.
Central Clearing mitigates credit risk because they’re organization of mutuality. Each clearn member shares in the risk on a pro-rate basis in the event of a members default.
Central Clearing protects its members from a default event in three ways:
1) Collecting Initial Margin
2) Profit & Loss paid/received daily
3) Collecting Additional Collateral
4) Quick resolution if a clearing member does not have sufficient collateral posted with the CCP
the clearing model above has develop since 1850 when the CBT first opened its doors to trade agriculture futures. Since 2008, use of the clearing mechanism is broadening to include contracts which may be executed OTC and submitted to a CCP for clearance and administration.
This page provides users with links to all major CCP’s, the primary products cleared at the CCP and their collateral rules.
The primary exchanges for Interest Rate Swap & Credit Default Swaps (CDS) are:
EXCHANGE: Chicago Mercantile Exchange
ELIGIBLE COLLATERAL: CME Eligible Collateral
ELIGIBLE COLLATERAL: LCH Eligible Collateral
ELIGIBLE COLLATERAL: LCH Cross Currency Collateral
EXCHANGE: Interncontinental Exchange (ICE)
ELIGIBLE COLLATERAL: ICE Eligible Collateral
MARGIN CALCULATION: ICE Margin Calculations are detailed in this presentation
ISDAFIX: ICE LIBOR Fixing
Compression is an important part of the onboarding of old swap positions into a CCP. If we can collapse down offsetting positions across a range of counterparties it will greatly reduce the overall risk in the system.
Sites for Statistics:
Swap Execution Facilities Information: