The Economics of Central Clearing; a commentary
An interesting paper by a senior CCP leader on the economics of central clearing.
"In my view, the two most compelling arguments for central clearing in the paper are the value of multilateral netting, which is not unique to CCPs, and the fact that CCPs through their rules address what Albert and Guillaume describe as the fact that "…investors are imperfectly able to raise bilateral margins". Indeed, it is this second fact that compelled global regulators, as part of the 2009 G20 meeting in Pittsburgh, to encourage mandated central clearing of standardised derivatives.
Prior to the financial crisis, I worked at a global derivatives dealer with a large credit default swap book, all with their myriad of attached credit support annexes. Every few weeks we went to the Federal Reserve Bank of New York to report our progress on getting the list of outstanding confirmations successfully compared. The most interesting thing about that list, which was not short, is that the oldest and largest value differences were with the largest other dealer counterparties.
Operations professionals and ultimately traders could encourage the smaller counterparties to agree with their valuations and collateral requirements. The larger players, however, would not accept those determinations unless made by the Federal Reserve, and that took time." - Davidson
Click here to read the full commentary by John P. Davidson, Chief Executive Officer, Options Clearing Corporation (OCC)