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Regulating Financial Derivatives

Clearing and Central Counterparties

Alexandra G. Balmer

This book puts forward a holistic approach to post-crisis derivatives regulation, providing insight into how new regulation has dealt with the risk that OTC derivatives pose to financial stability. It discusses the implications that post crisis regulation has had on central counterparties and the risk associated with clearing of OTC derivatives. The author offers a novel solution to tackle the potential negative externalities from the failure of a central counterparty and identifies potential new risks arising from post crisis reforms.
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Chapter 3: Clearing

Alexandra G. Balmer

Extract

The third chapter offers a definition of clearing and central counterparties (CCPs), as well as the historic development and origins of CCPs. The main concepts of clearing, i.e. member selection, novation, netting, collateral and default fund mechanism, and transparency requirements are discussed. Also, the success of LCH.Clearnet in winding down its exposure to Lehman Brothers is highlighted as a case study to underline why clearing was mandated in the wake of the crisis for financial derivatives.

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