Central Counterparties: Mandatory Central Clearing and Initial Margin Requirements for OTC Derivatives

Chapter 12

Analysis of the Impact of Clearing and Margining

Without reflection, we go blindly on our way, creating more unintended consequences, and failing to achieve anything useful.

Margaret J. Wheatley (1941–)

12.1 THE CLEARING LANDSCAPE

Based on estimates from the Financial Stability Board (FSB 2013) as of the start of 2013, around US$158 trillion and US$2.6 trillion of OTC interest rate derivatives and credit derivatives respectively were cleared. This represents 41% and 12% of the total outstanding notional amounts in these products respectively. This total OTC notional already represents more than double the exchange-traded derivative market size (e.g. see Figure 2.4).

A question that should be asked is what difficulties will exist in increasing clearing across the bilateral OTC derivative market. This chapter aims to assess the impact of clearing, and highlight the advantages and disadvantages that may influence the rate of increase of cleared OTC notional amounts. We will also discuss the liquidity impact of the mandatory clearing requirements and bilateral margining rules.

12.1.1 Bilateral vs. central clearing

We begin in Table 12.1 by contrasting at a high level some of the differences between bilateral and central clearing. Bilateral clearing follows a ‘survivor pays’ approach where parties hold capital against possible losses when their counterparties default. Such capital is typically calculated based on a one-year time horizon and is sensitive to credit quality ...