The Risk Controllers: Central Counterparty Clearing in Globalised Financial Markets

19

Clearing Swaps

19.1 NEW PRODUCTS, NEW CONTENDERS, NEW HORIZONS

The events of September and October 2008 inspired a rapid expansion of products and financial instruments considered suitable for clearing. New and established CCPs came forward with a host of novel projects to serve a wide range of markets in response to concerns about counterparty defaults and in anticipation of legislation to regulate OTC derivatives.

Four forces helped to determine which assets were either introduced or considered for clearing: the ambition of regulators; the needs – sometimes newly discovered – of users; competition among clearing providers; and the disruption of established market patterns, often through wild price swings.

The attrition rate was high, however. Some projects, announced with great fanfare, failed to progress beyond the development phase because of technical problems. Others wilted under the scrutiny of regulators. One of the steepest hurdles was gaining acceptance in financial markets marked by tribal divisions of which the most pronounced was that between the OTC community and exchanges. As with gold rushes down the centuries, the feverish activity, innovation and jockeying for position that gripped the business of clearing after Lehman's bankruptcy and the bail-out of AIG generated a huge amount of turmoil. It will be some years before all the winners and losers from the ‘clearing Klondike’ of 2008–10 are known.

Pressure from regulators such as the New York Fed was the main ...