Download or read book Does OTC Derivatives Reform Incentivize Central Clearing written by Samim Ghamami and published by . This book was released on 2016 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: The reform program for the over-the-counter (OTC) derivatives market launched by the G-20 nations in 2009 seeks to reduce systemic risk from OTC derivatives. The reforms require that standardized OTC derivatives be cleared through central counterparties (CCPs), and they set higher capital and margin requirements for non-centrally cleared derivatives. Our objective is to gauge whether the higher capital and margin requirements adopted for bilateral contracts create a cost incentive in favor of central clearing, as intended. We introduce a model of OTC clearing to compare the total capital and collateral costs when banks transact fully bilaterally versus the capital and collateral costs when banks clear fully through CCPs. Our model and its calibration scheme are designed to use data collected by the Federal Reserve System on OTC derivatives at large bank holding companies. We find that the main factors driving the cost comparison are (i) the netting benefits achieved through bilateral and central clearing; (ii) the margin period of risk used to set initial margin and capital requirements; and (iii) the level of CCP guarantee fund requirements. Our results show that the cost comparison does not necessarily favor central clearing and, when it does, the incentive may be driven by questionable differences in CCPs' default waterfall resources. We also discuss the broader implications of these tradeoffs for OTC derivatives reform.

Download or read book Regulating Financial Derivatives written by Alexandra G. Balmer and published by Edward Elgar Publishing. This book was released on 2018-06-29 with total page 256 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book puts forward a holistic approach to post-crisis derivatives regulation, providing insight into how new regulation has dealt with the risk that OTC derivatives pose to financial stability. It discusses the implications that post crisis regulation has had on central counterparties and the risk associated with clearing of OTC derivatives. The author offers a novel solution to tackle the potential negative externalities from the failure of a central counterparty and identifies potential new risks arising from post crisis reforms.

Download or read book Post Trade Processing of OTC Derivatives written by Olga Lewandowska and published by BoD – Books on Demand. This book was released on 2020-04-30 with total page 222 pages. Available in PDF, EPUB and Kindle. Book excerpt: The financial crisis of 2007–2009 exposed the weaknesses of the global over-the-counter (OTC) derivatives market such as limited transparency regarding risk exposures, poor counterparty risk management practices, and the risk of contagion arising from interconnectedness in this market. In the aftermath of the financial crisis, regulators introduced worldwide legislative and regulatory changes aimed at increasing the transparency and stability of the financial markets. In this book, Dr. Olga Lewandowska explores those novel regulatory solutions and their impact. The main focus is on central counterparty (CCP) clearing that became mandatory for OTC derivatives under the new regulatory paradigm. In four research papers, she analyzes CCP from different risk perspectives and based on four diverse research methods. Her book offers a comprehensive assessment of the risk-reduction potential of the CCPs, their implications for the financial markets, and the practical challenges in the implementation of the recent financial market reforms.

Download or read book Central Counterparties written by Jon Gregory and published by John Wiley & Sons. This book was released on 2014-06-25 with total page 328 pages. Available in PDF, EPUB and Kindle. Book excerpt: Practical guidance toward handling the latest changes to the OTC derivatives market Central Counterparties is a practical guide to central clearing and bilateral margin requirements, from one of the industry's most influential credit practitioners. With up-to-date information on the latest regulations imposed after the global financial crisis, this book covers the mechanics of the clearing process and analyses the resulting consequences. Detailed discussion explains the ways in which the very significant clearing and margining rules will affect the OTC derivatives market and the financial markets in general, with practical guidance toward implementation and how to handle the potential consequences. Over-the-counter derivatives were blamed by many for playing a major role in the 2007 financial crisis, resulting in a significant attention and dramatic action by policymakers, politicians, and regulators to reduce counterparty credit risk which was seen as a major issue in the crisis. The two most important regulatory changes are the mandatory clearing of standardised OTC derivatives, and the requirements for bilateral margin posting in non-standard OTC contracts. Central Counterparties is a complete reference guide to navigating these changes, providing clarification and practical advice. Review the mitigation of counterparty credit risk with the historical development of central clearing Clarify the latest regulatory requirements imposed by Dodd-Frank, EMIR, Basel III and more Learn the mechanics of central clearing, with special attention to complex issues such as margin calculations, the loss waterfall, client clearing and regulatory capital rules Gain insight into the advantages and disadvantages of clearing and bilateral margin requirements, and the potential issues that arise As the clearing and margining mandates are phased in, the associated costs will be severe enough to dramatically shift the topology of the financial markets and transform the nature of risk. Central Counterparties provides the information, clarification and expert insight market practitioners need to get up to speed quickly.

Download or read book OTC Derivatives Bilateral Trading and Central Clearing written by David Murphy and published by Springer. This book was released on 2013-08-07 with total page 315 pages. Available in PDF, EPUB and Kindle. Book excerpt: After the credit crisis, supervisors enacted a range of financial reforms. In particular, they radically changed the nature of the OTC derivatives market via a number of measures, notably mandatory central clearing. This book discusses the market before the crisis, explains what central clearing is, and outlines the consequences of the new rules.

Download or read book Central Counterparties Resolution An Unresolved Problem written by Mr.Manmohan Singh and published by International Monetary Fund. This book was released on 2018-03-20 with total page 23 pages. Available in PDF, EPUB and Kindle. Book excerpt: Recovery and resolution regimes are being developed for central counterparties (CCPs). We analyse current resolution tools in the context of policy, which is to restore the critical functions of a failed CCP. We conclude that the toolkit is insufficient to avoid the costs of resolution being borne by taxpayers, and propose alternative policy suggestions for addressing the problem of a failed CCP.

Download or read book Compulsory Central Clearing of OTC Derivatives written by Louise Gullifer and published by . This book was released on 2018 with total page 18 pages. Available in PDF, EPUB and Kindle. Book excerpt: New regulation brought in as a result of the global financial crisis mean that more reliance than ever is being placed on collateral, not just as mitigation of credit risk in bilateral financing transactions, but as one of the main techniques supporting the architecture of the regulated capital markets. This is particularly true in the derivatives market, where, for transactions which meet a specified degree of standardisation, compulsory clearing through central counterparties is being introduced pursuant to the decision taken at the G20 summit in Pittsburgh in September 2009.The Regulation introducing compulsory central clearing in Europe ('EMIR'),takes an ambivalent attitude towards collateral. On one hand, it makes the provision of collateral to central counterparties ('CCPs') compulsory,in order to protect CCPs from credit risk if their counterparties default. On the other hand, it mandates particular collateral holding models, in order to protect counterparties from the risk of CCP insolvency, and to protect clients from the risk of their clearing broker's insolvency.Both these requirements result in vastly increased demand for quality collateral.For many market participants this is only achievable at considerable cost. There is every incentive for the market to develop ways of reducing the amount of collateral that is required to be posted, and to enable the available collateral to 'go further'. The chief technique used is netting of transactions: the more netting there is, the less exposure and therefore the less collateral is required. One of the benefits of central clearing is reduction of exposure through multilateral netting. However, netting at lower levels brings its own costs and difficulties. The market challenge has been to produce a range of collateral holding models so that participants can choose the particular balance of risks and costs which suits them.The purpose of this paper is to examine the new structure in relation to central clearing,as well as some of the market solutions, to analyse the legal position of each under English law and the resulting mix of risks and protections offered by each technique.

Download or read book Collateral Netting and Systemic Risk in the OTC Derivatives Market written by Mr.Manmohan Singh and published by International Monetary Fund. This book was released on 2010-04-01 with total page 17 pages. Available in PDF, EPUB and Kindle. Book excerpt: To mitigate systemic risk, some regulators have advocated the greater use of centralized counterparties (CCPs) to clear Over-The-Counter (OTC) derivatives trades. Regulators should be cognizant that large banks active in the OTC derivatives market do not hold collateral against all the positions in their trading book and the paper proves an estimate of this under-collateralization. Whatever collateral is held by banks is allowed to be rehypothecated (or re-used) to others. Since CCPs would require all positions to have collateral against them, off-loading a significant portion of OTC derivatives transactions to central counterparties (CCPs) would require large increases in posted collateral, possibly requiring large banks to raise more capital. These costs suggest that most large banks will be reluctant to offload their positions to CCPs, and the paper proposes an appropriate capital levy on remaining positions to encourage the transition.

Download or read book Comparing G 20 Reform of the Over The Counter Derivatives Markets written by James K. Jackson and published by Createspace Independent Pub. This book was released on 2013-03-13 with total page 58 pages. Available in PDF, EPUB and Kindle. Book excerpt: Derivatives, or financial instruments whose value is based on an underlying asset, played a key role in the financial crisis of 2008-2009. Congress directly addressed the governance of the derivatives markets through the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank; P.L. 111-203; July 21, 2010). This Act, in Title VII, sought to bring the largely unregulated over-the-counter (OTC) derivatives markets under greater regulatory control and scrutiny. Pillars of this approach included mandating that certain OTC derivatives be subject to central clearing, such as through a clearinghouse, which involves posting margin to cover potential losses; greater transparency through trading on exchanges or exchange-like facilities; and reporting trades to a repository, among other reforms. In the debates over Dodd-Frank and in subsequent years, many in Congress have raised the following important questions: If the United States takes stronger regulatory action than other countries, will business in these OTC derivatives markets shift overseas? Since OTC derivatives markets are global in nature, could derivatives trading across borders, or business for U.S. financial firms that engage in these trades, be disrupted if other countries do not adopt similar regulatory frameworks? The first step in addressing these congressional concerns is to examine the degree to which other major countries have adopted similar legislation and regulation as the United States, particularly in light of commitments from the Group of Twenty nations (G-20) to adopt certain derivatives reforms. Following the financial crisis, G-20 leaders (generally political heads of state) established a reform agenda and priorities within that agenda for regulating and overseeing OTC derivatives. The G-20 as an organization has no enforcement capabilities, but relies on the members themselves to implement reforms. According to recent surveys, most members are making progress in meeting the self-imposed goal of implementing major reforms in derivatives markets. Only the United States appears to have met all the reforms endorsed by the G-20 members within the desired timeframe of year-end 2012. The European Union (EU), Japan, Hong Kong, and the United States have each taken significant steps towards implementing legislation requiring central clearing. However, in most of these jurisdictions legislation has not yet been followed up with technical implementing regulations for the requirements to become effective, according to the Financial Stability Board (FSB), which conducts the surveys. Most authorities surveyed estimated that a significant proportion of interest rate derivatives would be centrally cleared by year-end 2012, but they were less confident of progress for other asset classes. The EU appeared to be making progress in its G-20 derivatives regulatory commitments, particularly in central clearing and trade repository-reporting requirements, but at a slower pace than the United States, according to the FSB. This may be due in part to the need for legislation to be passed by individual national legislatures even when agreed broadly by the EU. As of October 2012, however, only the United States had adopted legislation requiring standardized derivatives to be traded on exchanges and electronic platforms. This report examines the G-20 recommendations for reforming OTC derivatives markets and presents the result of self-assessment surveys measuring the performance of G-20 members and some FSB members to date in meeting their commitments. The Appendix to the report presents more detailed information on the status of individual jurisdictions in implementing the G-20- endorsed reforms. The Glossary defines key international bodies and related financial terms and concepts.

Download or read book Over the Counter OTC Derivatives Central Clearing and Financial Stability written by Arshadur Rahman and published by . This book was released on 2015 with total page 13 pages. Available in PDF, EPUB and Kindle. Book excerpt: Over-the-counter (OTC) derivatives markets have grown significantly over recent decades, and the United Kingdom is an important international centre for them. These markets facilitate the hedging of risk, but they can also give rise to complex exposures within the financial system. Following the financial crisis, policymakers have promoted reforms to these markets. These include the greater use of central counterparties (CCPs) to 'centrally clear' transactions, managing risk within the system. The concentration of risk within CCPs does however highlight other challenges, including the need for supervisory co-operation internationally. Authorities are working to address these issues.

Download or read book Systemic Risk and Centralized Clearing of OTC Derivatives written by Svetlana Borovkova and published by . This book was released on 2013 with total page 56 pages. Available in PDF, EPUB and Kindle. Book excerpt: In September 2009, G20 paved the way for the mandatory central clearing of over-the-counter (OTC) derivatives, which came into effect in December 2012. This new regulation involves a central clearing counterparty (CCP): a financial institution acting as an intermediary between buyers and sellers of OTC derivatives. The rationale behind this regulation is that, by removing bilateral agreements, CCPs will absorb the risks facing individual firms and act as a cushion in the event of market stress. However, this increases the systemic importance of CCPs within the financial system.In this paper, we analyze the effect of central clearing of OTC derivatives on the financial system stability by means of network simulation approach. We build simple but realistic networks of financial firms, connected by bilateral links and via a single CCP. We simulate balance sheets of firms and introduce shocks to the system to simulate defaults. The default mechanism and shock absorption in presence of the CCP is modeled in the way that maximally reflects the reality. We run Monte Carlo simulations of the networks' evolution and obtain their default and contagion characteristics. We analyze the likelihood of the CCP's default and compare the stability of the financial network with and without the CCP for various network configurations and market scenarios.We find that, for a homogeneous financial system, the presence of the CCP increases the network's stability and the probability of the CCP's failure is virtually zero. However, for non-homogeneous financial networks, we find the opposite effects: the presence of the CCP leads in this case to a disproportionately large probability of contagion defaults, especially for smaller financial firms. Furthermore, we find that the probability of the CCP failure is substantial in this case, regardless of the capitalization requirements. In all, we find that non-homogeneous networks exhibit greater instability and contagion in the presence of the CCP: a worrying fact, given that any real financial system is highly inhomogeneous in terms of size and concentration.

Download or read book Recommendations for Central Counterparties written by Group of Ten. Committee on Payment and Settlement Systems and published by . This book was released on 2004 with total page 80 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Estimating the Costs of Financial Regulation written by Mr.Andre Santos and published by International Monetary Fund. This book was released on 2012-09-11 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: Staff Discussion Notes showcase the latest policy-related analysis and research being developed by individual IMF staff and are published to elicit comment and to further debate. These papers are generally brief and written in nontechnical language, and so are aimed at a broad audience interested in economic policy issues. This Web-only series replaced Staff Position Notes in January 2011.

Download or read book The Morning After The Impact on Collateral Supply After a Major Default written by Dermot Turing and published by International Monetary Fund. This book was released on 2018-10-31 with total page 26 pages. Available in PDF, EPUB and Kindle. Book excerpt: Changes to the regulatory system introduced after the financial crisis include not only mandatory clearing of OTC derivatives at central counterparties and margining of uncleared derivatives, but also prudential measures, including notably a “Liquidity Coverage Ratio” which obliges firms to set aside high-quality liquid assets (HQLA) as a stopgap against anticipated cash outflows. We examine factors which may affect the demand for HQLA in a severely stressed market following a hypothetical default of a major clearing member. Immediately following a major default, the amount of HQLA demanded by the whole market would spike. We estimate the size of the spike and draw conclusions as to whether the depth of the market is adequate to absorb it.

Download or read book The Lender of Last Resort Function after the Global Financial Crisis written by Marc Dobler and published by International Monetary Fund. This book was released on 2016-01-22 with total page 63 pages. Available in PDF, EPUB and Kindle. Book excerpt: The global financial crisis (GFC) has renewed interest in emergency liquidity support (sometimes referred to as “Lender of Last Resort”) provided by central banks to financial institutions and challenged the traditional way of conducting these operations. Despite a vast literature on the topic, central bank approaches and practices vary considerably. In this paper we focus on, for the most part, the provision of idiosyncratic support, approaching it from an operational perspective; highlighting different approaches adopted by central banks; and also identifying some of the issues that arose during the GFC.

Download or read book Revisiting Risk Weighted Assets written by Vanessa Le Leslé and published by International Monetary Fund. This book was released on 2012-03-01 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper, we provide an overview of the concerns surrounding the variations in the calculation of risk-weighted assets (RWAs) across banks and jurisdictions and how this might undermine the Basel III capital adequacy framework. We discuss the key drivers behind the differences in these calculations, drawing upon a sample of systemically important banks from Europe, North America, and Asia Pacific. We then discuss a range of policy options that could be explored to fix the actual and perceived problems with RWAs, and improve the use of risk-sensitive capital ratios.

Download or read book Global Financial Stability Report April 2010 written by International Monetary Fund. Monetary and Capital Markets Department and published by INTERNATIONAL MONETARY FUND. This book was released on 2010-05-20 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Risks to global financial stability have eased as the economic recovery has gained steam. But policies are needed to reduce sovereign vulnerabilities, ensure a smooth deleveraging process, and complete the regulatory agenda. The April 2010 Global Financial Stability Report examines systemic risk and the redesign of financial regulation; the role of central counterparties in making over-the-counter derivatives safer; and the effects of the expansion of global liquidity on receiving economies.