As someone that works exclusively in the buy side, I tend to ignore clearing issues as that is the dealers problem, isn't it?
However since last summer there has been a tide of opinion swamping the markets as a whole about how to shore up some of the more transparent risks in the global derivatives infrastructure and we seem to have come to the conclusion that more focus is needed here. In the last few months and weeks the likes of Ben Bernanke, CRMPG, IOSCO, the EU and the OFT in the UK, plus a raft of other notables have been holding forth on the subject and the exchanges and dealers are all in twist about it. So here is a brief synopsis of what is going on....Firstly, and most importantly, you may be forgiven in thinking that all this talk of a Central Counterparty (CCP) would mean that there will be just one service, but that is far from true.
In Europe Liffe announced back in march that it was creating LiffeClear (see article here) and more recently that it hoped to start the clearing service for credit derivatives a few days ago (see article here) via its Bclear OTC facility. Unilke the rival US CCorp facility (see below) Liffe intends to clear not just interdealer trades but also those involving end clients.
In the US the CCorp facility also announced a service (see article here) that would start at the end of this year. Despite the fact this is just an interdealer facility, CCorp is probably the most powerful of all these products as it is backed by 11 Wall St firms, and for a clearing product to succeed you have to keep the dealers happy.
The CME did not keep the dealers happy and is consequently struggling to get its offering off the ground. They plan to allow bliaterally traded but standardised swaps to go through its clearing facility. However as a source from another exchange was quoted as saying at the time "The idea of a wider swaps clearing service is appealing - but any exchange seeking to introduce this will immediately run into problems with dealer's vested interests. Introducing such a mechanism would mean that one bank's swaps become fungible with another - and that would have an immediate impact on the margins". They did sign up several buy side clients, but the dealer community stayed away and we have now passed the planned launch date. Indeed, as a further ignominy, only a few days ago their CEO Craig Donohue found himself in front of a panel of US Senators defending the CME's move into clearing.
Both Eurex and ICE (now that is has bought Creditex) seem more than likely to enter the foray sooner rather than later, though no plans have been announced yet.
So, if (like me) you are a buy-sider, should all this be worrying to you? I dont really think so. I would be more concerned about mitigating my risk exposures to particular dealers (my making sure I have the right ISDAs/CSAs in place and a collateral management function to support this, by ensuring that I have independent pricing capabilities, and by reconciling my portfolios using Tri-Optima's TriResolve or Markit's PortRec). Clearing clearly reduces systemic risk as a whole in the market, but I personally am still unclear just how far the OTC world will drift onto exchanges and how much will have to stay bilateral.
