About a-team Marketing Services
The knowledge platform for the financial technology industry
The knowledge platform for the financial technology industry

A-Team Insight Blogs

CCP for the CDS Market Will Have Very Little Impact on Risk Mitigation, Says Adsatis

Subscribe to our newsletter

Originally appeared in MiFID Monitor

The market may be overestimating the impact that the introduction of a central clearing counterparty (CCP) will have on systemic risk, according to London-based consultancy Adsatis. The firm’s recent white paper, entitled “A central counterparty for OTC credit derivatives – are we over estimating the importance?”, examines the benefits and possible disadvantages of clearing OTC credit derivatives via a CCP.

Bill Hodgson, Adsatis consultant and author of the paper, explains: “The benefits of a CCP for OTC credit products have been widely advertised as reducing ‘systemic’ risk in the capital markets. Our contention is that changing the processing of one high volume product makes no difference to the entire capital markets system, leaving the wider system unaffected. The inability of any CCP to take on the risk mitigation of complex structured credit products, means the CDOs and SIVs at the centre of the current crisis remain untouched by this initiative.”

The white paper examines the characteristics of a CCP and how these will affect industry participants in the CDS market. Hodgson identifies three main benefits to a member of a CCP: the release of credit line usage, the release of regulatory capital and more efficient back office processing.

But he also identifies what he sees as a negative impact: “One downside of having OTC contracts via a CCP is the exclusion of these trades from the existing ISDA based margin agreement between a pair of firms. With a large number of trades being novated to the CCP, this can potentially reduce the effect of exposure netting, and increase the amount of margin required in the bilateral relationship.”

The CCP will also provide benefits to regulators such as a single window into the risk exposures of its members, says Hodgson.

However, he is sceptical that the initiatives will benefit the industry significantly in terms of reducing systemic risk. “If your definition of systemic means the whole capital market, then given the narrow scope of the OTC credit CCP, this benefit doesn’t seem justified given the wide range of other business transacted by the major firms,” he says.

Hodgson puts the introduction of the CCP into this market down to two primary factors: public image that something is being done and the desire of regulators to more closely monitor the sector. He believes the existence of a credit CCP won’t prevent a future crisis and will be a footnote to any history of this period. “If anything this is a tactical step which will be forgotten once launched as we continue to see the after effects of the crisis. And a final note, given the scale of losses in the market so far, can a single CCP absorb such losses bringing concentration of risk into a single entity?”

Subscribe to our newsletter

Related content

WEBINAR

Recorded Webinar: Best practices for metadata management

Metadata has become central to financial firms as a means of enriching, discovering and effectively using both business and technical data. Its management is equally important, particularly in capital markets applications such as data lineage and data governance, which require a clear view of data and its provenance, and the ability to scale and support...

BLOG

The Case Against Ripping and Replacing: Why Capital Markets Firms Should Build Intelligence Into What They Already Have

By Neil Vernon, Chief Product Officer, Gresham. For years, capital markets firms have faced the same challenge: modernising sprawling, legacy data systems. Each attempt follows a familiar pattern – ambitious platform overhauls, eight-figure budgets, years of disruption – yet the old systems often remain in use long after the new ones are live. Replacing systems...

EVENT

ExchangeTech Summit London

A-Team Group, organisers of the TradingTech Summits, are pleased to announce the inaugural ExchangeTech Summit London on May 14th 2026. This dedicated forum brings together operators of exchanges, alternative execution venues and digital asset platforms with the ecosystem of vendors driving the future of matching engines, surveillance and market access.

GUIDE

Putting the LEI into Practice

Hundreds of thousands of pre-Legal Entity Identifiers (LEIs) have been issued by pre-Local Operating Units (LOUs) in the Global LEI System (GLEIS), and the standard entity identifier has been mandated for use by regulators in both the US and Europe. As more pre-LEIs are issued ahead of the establishment of the global systems’ Central Operating...