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Edited by Kern Alexander and Rahul Dhumale
Chapter 11: Central Counterparties and Derivatives
Chryssa Papathanassiou Editors’ abstract: Dr Chryssa Papantahssiou analyses how central counterparties mitigate counterparty risk and thus are conducive to financial stability. CCPs’ service is often compared with bilateral netting in order to illustrate the advantages and disadvantages of each mechanism. The chapter argues that a CCP is useful – in addition to the known risk mitigation arguments – because it serves as (1) a coordinator administering the default procedure; (2) according to clear and transparent rules; and (3) for multiple products and markets. The default coordination may prove useful during periods of market stress and is an element missing in bilateral netting. CCPs use various legal techniques to achieve their results. Public authorities have in the past shared an interest in the legal protection of fundamental procedures which a CCP undertakes. The EU is adopting legislation that would require the use of CCPs for standardised over-the-counter derivative contracts. There are still, however, a number of issues to be addressed for safe and effective clearing. INTRODUCTION Clearing is ‘the process of transmitting, reconciling and, in some cases, confirming payment orders or security transfer instructions prior to settlement, possibly including the netting of instructions and the establishment of final positions for settlement’.1 After clearing, if there is no netting involved, the positions of clients are transformed into positions of the participants in a system. The clearing for exchange-traded derivatives and commodities has been traditionally performed by clearing houses which become central counterparties (CCPs)2 to new or existing contracts between trading partners. That allows...
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