Since the outbreak of the financial crisis and the introduction of the European Market Infrastructure Regulation (EMIR), central clearing has played a significant role in international financial markets.
This development is supported by the high share of centrally cleared OTC transactions for both mandated and non-mandated OTC derivatives. Regulatory requirements as well as potential cost advantages contribute significantly to this development.
Over the period from 2010 to 2019, the clearing rates for IRD and CDS increased substantially. The percentage of centrally cleared IRD rose from 55 percent in 2010 to 75 percent in 2017. The share of centrally cleared CDS rose from 10 percent in 2010 to 55 percent in 2017. FX clearing rates have even more than doubled between 2016 and 2019.
Beginning in 2015, for a set of standardized contracts, including forward rate agreements (FRA), interest rate swaps (IRS), and credit default swaps (CDS), central clearing was mandated. Furthermore, uncleared OTC contracts were charged with higher capital and margin requirements. In addition, the introduction of uncleared margin rules has been and will further promote the incentive to centrally clear OTC derivative transactions.
For market participants, the most critical factors for incentivizing central clearing are regulatory capital costs, risk management considerations, netting opportunities, and differences in bid-offer spreads. In contrast, high fixed costs, initial margin requirements, access to and the capacity of clearing arrangements and collateral eligibility criteria represent the most critical disincentivizing factors for central clearing.
BearingPoint supports banks, exchanges, central counterparties, and other market participants in the functional design and implementation of new regulations and optimization measures. We provide a client-specific assessment based on the product portfolio, business model, and risk profile. The assessment includes optimization measures for future decisions on trading and clearing activities.