LawFinanceRisk ManagementFinancial MarketsFinancial RegulationFinancial Risk ManagementBanking RegulationCapital MarketsCentral Counterparty ClearingClearing Of DerivativesDerivatives Default ManagementFinancial RiskCentral Clearing MandatesCentral Clearing RegulationCentral Counterparty Clearing HousesCentral Counterparty Default ManagementCounterparty Risk PolicyOver-the-counter Derivatives ClearingRegulation Of Central CounterpartiesRisk
Capital markets are essential for funding and risk transfer, and regulators are moving toward mandatory central clearing of standardized OTC derivatives, concentrating risk in central counterparties that must maintain robust risk management to remain safe. If CCP mitigants are exhausted, a comprehensive recovery plan must mutualise remaining losses among surviving members, and if that fails, authorities must resolve the CCP without using public funds.
Capital markets – whether for raising funds or transferring risk – are a vital part of financial system. Perhaps even more so in the years ahead as banking is reregulated. The international authorities are working together to simplify the network of transactions by mandating that standardised over-the-counter (OTC) derivatives are centrally cleared. That entails a concentration of risk around central counterparties (CCPs) and so relies upon them being safe and sound. CCPs’ risk management is a first line of defence: managing clearing-member positions to reduce the likelihood of default; ensuring financial mitigants to cover potential losses are adequate. Should mitigants be exhausted, CCPs need a comprehensive recovery plan, including ex ante arrangements to mutualise emaining losses amongst surviving members. In case the plan fails, the authorities must be able to resolve a CCP safely without recourse to public funds.