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 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 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 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 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 228 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 Clearing OTC derivatives an analysis of the post crisis policy reform on systemic risk written by Alexandra Gabrielle Balmer and published by . This book was released on 2017 with total page 219 pages. Available in PDF, EPUB and Kindle. Book excerpt:

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 Making OTC Derivatives Safe A Fresh Look written by Mr.Manmohan Singh and published by International Monetary Fund. This book was released on 2011-03-01 with total page 24 pages. Available in PDF, EPUB and Kindle. Book excerpt: Recent regulatory efforts, especially in the U.S. and Europe, are aimed at reducing moral hazard so that the next financial crisis is not bailed out by tax payers. This paper looks at the possibility that central counterparties (CCPs) may be too-big-to-fail entities in the making. The present regulatory and reform efforts may not remove the systemic risk from OTC derivatives but rather shift them from banks to CCPs. Under the present regulatory overhaul, the OTC derivative market could become more fragmented. Furthermore, another taxpayer bailout cannot be ruled out. A reexamination of the two key issues of (i) the interoperability of CCPs, and (ii) the cost of moving to CCPs with access to central bank funding, indicates that the proposed changes may not provide the best solution. The paper suggests that a tax on derivative liabilities could make the OTC derivatives market safer, particularly in the transition to a stable clearing infrastructure. It also suggests reconsideration of a "public utility" model for the OTC market infrastructure.

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 Regulation and Supervision of the OTC Derivatives Market written by Ligia Catherine Arias-Barrera and published by Routledge. This book was released on 2018-05-11 with total page 215 pages. Available in PDF, EPUB and Kindle. Book excerpt: The over-the-counter (OTC) derivatives market has captured the attention of regulators after the Global Financial Crisis due to the risk it poses to financial stability. Under the post-crisis regulatory reform the concentration of business, and risks, among a few major players is changed by the concentration of a large portion of transactions in the new market infrastructures, the Central Counterparties (CCPs). This book, for the first time, analyses the regulatory response of the United Kingdom and the United States, the two largest centres of OTC derivatives transactions, and highlights their shortcomings. The book uses a normative risk-based approach to regulation as a methodological lens to analyse the UK regime of CCPs in the OTC derivatives market. It specifically focuses on prudential supervision and conduct of business rules governing OTC derivatives transactions and the move towards enhancing the use of central clearing. The resulting analysis, from a normative risk based approach, suggests that the UK regime for CCPs does not fulfil what would be expected if a coherent risk based approach was taken. Our comments on the Dodd-Frank Act highlight that the incoherent adoption of risk-based approach to regulation affects the effectiveness of the US regime for CCPs. Such a regime does not follow the pace of events of ‘innovation risk’; in particular, the foreseeable changes FinTech will bring to the OTCDM and central clearing services. The second inadequacy of the US regime concerns the dual regulatory structure of the CFTC and the SEC, and the inadequate adoption of different and not well-coordinated regulatory strategies. We also analyse the cross-border implications of the US regime for non-US CCPs that provide clearing services to US market participants. Finally, we study the negative effects of the absence of a clearly defined resolution regime for CCPs.

Download or read book When Genius Failed written by Roger Lowenstein and published by Random House Trade Paperbacks. This book was released on 2001-10-09 with total page 290 pages. Available in PDF, EPUB and Kindle. Book excerpt: “A riveting account that reaches beyond the market landscape to say something universal about risk and triumph, about hubris and failure.”—The New York Times NAMED ONE OF THE BEST BOOKS OF THE YEAR BY BUSINESSWEEK In this business classic—now with a new Afterword in which the author draws parallels to the recent financial crisis—Roger Lowenstein captures the gripping roller-coaster ride of Long-Term Capital Management. Drawing on confidential internal memos and interviews with dozens of key players, Lowenstein explains not just how the fund made and lost its money but also how the personalities of Long-Term’s partners, the arrogance of their mathematical certainties, and the culture of Wall Street itself contributed to both their rise and their fall. When it was founded in 1993, Long-Term was hailed as the most impressive hedge fund in history. But after four years in which the firm dazzled Wall Street as a $100 billion moneymaking juggernaut, it suddenly suffered catastrophic losses that jeopardized not only the biggest banks on Wall Street but the stability of the financial system itself. The dramatic story of Long-Term’s fall is now a chilling harbinger of the crisis that would strike all of Wall Street, from Lehman Brothers to AIG, a decade later. In his new Afterword, Lowenstein shows that LTCM’s implosion should be seen not as a one-off drama but as a template for market meltdowns in an age of instability—and as a wake-up call that Wall Street and government alike tragically ignored. Praise for When Genius Failed “[Roger] Lowenstein has written a squalid and fascinating tale of world-class greed and, above all, hubris.”—BusinessWeek “Compelling . . . The fund was long cloaked in secrecy, making the story of its rise . . . and its ultimate destruction that much more fascinating.”—The Washington Post “Story-telling journalism at its best.”—The Economist

Download or read book Mandated Centralized Clearing for Standard OTC Derivatives written by Veronika Valchuk and published by . This book was released on 2012 with total page 74 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Post Trade Processing of OTC Derivatives written by Olga Lewandowska and published by . This book was released on 2020 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Hedging Against the Next Financial Crisis written by Andrew Nichol and published by . This book was released on 2014 with total page 25 pages. Available in PDF, EPUB and Kindle. Book excerpt: In response to criticisms regarding the accumulation of systemic risk and lack of transparency in over-the-counter [“OTC”] derivatives markets, regulators have introduced new central clearing and reporting requirements for OTC derivatives transactions. However, the capacity of a central counter-party clearinghouse [“CCP”] to limit the short-term contagion risk of a systemic market event is contingent on a clear distinction between systemic risk and ordinary counter-party risk. This article explores the role of CCPs in providing short term liquidity designed to limit the contagion risk associated with a counter-party's default. In doing so, it recommends that regulators should consider the use of ex ante counter-cyclical regulatory capital requirements, impose buyer-side margins to buffer against contagion risk, limit the extent to which credit risk can be fractioned, and introduce behavioral regulations for central clearing participants to address the moral hazard that may result from market participants relying on the CCP guarantee to offset remote exposures.

Download or read book Impact of Netting Portfolio Compression and Central Clearing on OTC Derivatives written by P. D. Aditya and published by . This book was released on 2015 with total page 6 pages. Available in PDF, EPUB and Kindle. Book excerpt: In order to avoid systemic risks in the financial markets, the G20 countries have come up with certain regulations in 2010. To reduce risks in the system, in accordance with G20 goals, certain measures such as netting, collateralization, portfolio compression and central clearing have been introduced for these OTC derivatives markets.This paper deals with the impacts of introducing these measures on OTC Derivatives.

Download or read book The Risk Controllers written by Peter Norman and published by John Wiley & Sons. This book was released on 2011-09-07 with total page 403 pages. Available in PDF, EPUB and Kindle. Book excerpt: Clearing houses, or CCPs, were among the very few organisations to emerge from the global financial crisis with their standing enhanced. In the chaotic aftermath of the bankruptcy of Lehman Brothers, they successfully completed trades worth trillions of dollars in a multitude of financial instruments across listed and over-the-counter markets, and so helped avert financial Armageddon. That success transformed the business of clearing. Governments and regulators around the world gave CCPs and the clearing services they provide a front-line role in protecting the global economy from future excesses of finance. CCPs, which mitigate risk in financial markets, responded by greatly expanding their activities, notably in markets for over-the-counter derivatives, and often in fierce competition with one another. In The Risk Controllers, journalist and author Peter Norman describes how CCPs operate, how they handled the Lehman default, and the challenges they now face. Because central counterparty clearing is a complex business with a long history that continues to influence decisions and structures even in today’s fast changing world, The Risk Controllers explores the development of CCPs and clearing from the earliest times to the present. It draws on the experiences of the people who helped to shape the business of clearing today. It sets the development of CCPs and clearing in the broader context of changes in society, politics and regulation. The book examines turning points, such as the 1987 stock market crash, that set clearing on a new path and the impact of long running trends, including the exponential growth of computer power and the ebb and flow of globalisation. Written in non-technical language, The Risk Controllers provides a unique and accessible guide to CCPs and clearing. It is essential reading for clearing professionals, legislators and regulators whose job it is to take this vitally important business into the future. “The recent crisis has, thankfully, renewed interest in the importance of central counterparties: how they can help preserve stability or, as Hong Kong showed in 1987, undermine stability if they are not super sound. Peter Norman’s book places the role of clearing houses in a historical context, and explains why the financial system’s plumbing matters so much. It should be read by anyone interested in building safer capital markets.” Paul Tucker, Deputy Governor Financial Stability, Bank of England

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.