Centralized Clearing for Over-the-Counter Derivatives

Rausser, Gordon C.; Balson, W.E.; Stevens, Reid

doi:10.2139/ssrn.1475351

Cited by 5 publications

(3 citation statements)

References 17 publications

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“…Furthermore, if the service provided by CCPs is recognised as a public good, 51 with the risk of free-riding (moral hazard), some authors argue that a public-private partnership could be promoted to control the ownership and the governance of this infrastructure on the one hand, and enforce policies to face diverging incentives between members and the infrastructure and control systemic risks on the other hand (Rausser et al, 2009). …”

Section: Standardisationmentioning

confidence: 99%

Shaping Reforms and Business Models for the OTC Derivatives Market: Quo Vadis?

Valiante¹

2010

SSRN Journal

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Now that the worst of the financial storm is over, regulators are setting new strategies to deal with the systemic importance of the €427 trillion ($604 trillion) over-the-counter (OTC) derivatives market. This paper explores the three major sources of disruptive effects in OTC derivatives: liquidity, counterparty risk and legal uncertainty. These risks affect the value chain of a typical derivative transaction and weaken the economic and legal rationale behind their widespread use. On the policy side, commitments have been made at G-20 level to draft uniform rules on a global scale "to build a safer financial system". This paper finds, however, that in practice, the EU and US proposals lay out divergent roads to meet common objectives and the author warns that such divergences may encourage regulatory and supervisory arbitrage. Policy options currently under discussion may need further revision. For instance, access to network clearing infrastructures, such as CCPs, can only be made available to a restricted group of eligible derivative products. Mechanisms of adverse selection and moral hazard, then, may at any time affect the efficient functioning of these crucial infrastructures for financial markets.

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Section: Standardisationmentioning

confidence: 99%

Shaping Reforms and Business Models for the OTC Derivatives Market: Quo Vadis?

Valiante¹

2010

SSRN Journal

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“…Rausser et al. () propose the creation of a central clearing counterparty house to manage systemic risk in OTC markets. Glode and Opp () study the relative merits of a centralized limit order market and an OTC market, arguing that, because of time‐consuming search, OTC traders have higher incentives to acquire expertise and screen their private informed counterparties.…”

Section: Introductionmentioning

confidence: 99%

Periodic, Complete‐participation Trade in the Lagos‐rocheteau Model

Liao

2019

Bulletin of Econ Res

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This paper contributes to a recent policy discussion regarding the costs and benefits of setting up a centralized electronic trading platform to replace over‐the‐counter (OTC) markets. We modify the Lagos and Rocheteau (2009, henceforth LR) asset trading model by replacing their investor‐dealer random matching and bilateral trade with a centralized competitive market that opens periodically. This arrangement preserves the main tension and trade‐off in LR. We then analyse and quantify when to introduce a centralized market and how frequently it should open in order to make it as efficiently as the decentralized OTC market in LR.

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“…

Purpose -Risk-based clearing has been proposed by Rausser et al (2010) for over-the-counter (OTC) derivatives. This paper aims to illustrate the application of risk-based margins to a case study of the mortgage-backed securities derivative portfolio of the American International Group (AIG) during the period 2005-2008.

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mentioning

confidence: 99%

Pretrade and risk-based clearing

Balson¹,

Rausser

2016

JFEP

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Purpose Risk-based clearing has been proposed by Rausser et al. (2010) for over-the-counter (OTC) derivatives. This paper aims to illustrate the application of risk-based margins to a case study of the mortgage-backed securities derivative portfolio of the American International Group (AIG) during the period 2005-2008. There exists sufficient publicly available information to examine AIG’s derivative portfolio and how that portfolio would depend on conjectural changes in margin requirements imposed on its OTC derivative positions. Generally, such data on OTC derivative portfolio positions are unavailable in the public domain, and thus, the AIG data provide a unique opportunity for an objective evaluation. Design/methodology/approach This paper uses modern financial methodology to evaluate risk-based margining and collateralization for the major OTC derivative portfolio of the AIG. Findings This analysis reveals that a risk-based margin procedure would have led to earlier margin calls of greater magnitude initially than the collateral calls actually faced by AIG Financial Products (AIGFP). The total margin ultimately required by the risk-based procedure, however, is similar in magnitude to the collateral calls faced by AIGFP by August 2008. It is likely that a risk-based clearing procedure applied to AIG’s OTC contracts would have led to the AIG undertaking significant hedging and liquidation of their OTC positions well before the losses built up to the point they had, perhaps avoiding the federal government’s orchestrated restructuring that occurred in September 2008. Originality/value There has been no published risk-based evaluations of a major OTC portfolio of derivatives for any company, let alone the AIG.

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Centralized Clearing for Over-the-Counter Derivatives

Cited by 5 publications

References 17 publications

Shaping Reforms and Business Models for the OTC Derivatives Market: Quo Vadis?

Shaping Reforms and Business Models for the OTC Derivatives Market: Quo Vadis?

Periodic, Complete‐participation Trade in the Lagos‐rocheteau Model

Pretrade and risk-based clearing

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