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Data Management

11:27 AM
Kevin McPartland,Senior Analyst, TABB Group
Kevin McPartland,Senior Analyst, TABB Group
Commentary
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Central Clearinghouse-Standard is Nice, Suitable is Better

Not all bilateral derivatives contracts are suited for central clearing and/or electronic trading.

“Despite early calls of some in Congress to force the central clearing of all OTC derivatives, cooler heads are prevailing and most in Washington, D.C. and Brussels understand that not all bilateral derivatives contracts are suited for central clearing and/or electronic trading,” writes TABB Group’s senior analyst Kevin McPartland in new commentary published today.

“The CME recently stated it would decline to clear certain OTC derivatives in order to maintain acceptable levels of risk. ICE Trust US said its focus in the next few months will be buy side access, single name CDS and moving into Europe – not the tranche products the dealers committed to central clearing by year-end.

The proposal from the Obama administration is just that – a proposal. It will take months, if ever, before laws are created and the details known. Determining the criteria for required central clearing of OTC derivative products will be a crucial part of that process.

Congress must be sure to spend these months not debating what is standard, but instead think more realistically about what makes a security suitable for central clearing. Is the product liquid? Can it be easily valued? Can margin be easily determined and unambiguous? These questions all lead to the ultimate gauge of suitability – a clearinghouse’s ability to manage risk.

Until these questions can be answered, mandating central clearing of OTC derivatives will do more harm than good. While the solutions to these challenges will not be easily agreed upon, failure to answer the question of clearinghouse suitability will create turmoil in the OTC derivatives market and set us up for future crisis.”

For a copy of the report, contact The TABB Group.

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