The leading knowledge platform for the financial technology industry
The leading knowledge platform for the financial technology industry

A-Team Insight Blogs

CCP Principles Can be Applied to Bilateral World of OTC Derivatives, Says Adsatis

Following on from its white paper last month, London-based consultancy Adsatis has published another report looking into the clearing counterparty (CCP) approach in comparison to bilateral agreements with regards to OTC derivatives. Adsatis consultant and author of the white paper, Bill Hodgson, reckons firms can apply aspects of the CCP approach to a non-CCP environment.

“Commentators, politicians and regulators have variously suggested hugely complex solutions to the worlds credit exposure crisis, such as a global trade registration system, clearing every single OTC product through a massive CCP, or abolishing OTC products altogether. Our contention is that the framework is already in place to handle the measurement and mitigation processes, but perhaps the market could learn from the CCP approach in how protection layers are constructed,” explains Hodgson.

The white paper, entitled “Comparing the ISDA bilateral exposure management model with a CCP”, like the title suggests, compares the way credit risk is managed using the bilateral ISDA Credit Support Annex (CSA) versus the risk management approach of a CCP. It highlights areas of difference such as membership criteria, quality of protection from credit risk and operational and timing issues.

Hodgson suggests that it may now be time for “CSA 2.0” in order to provide a more “meaningful link between risk and protection” in light of the current financial climate. Principles such as agreed data formats for publishing reconciliation data and the publication of the date on which the last valuation was calculated for a trade, both of which are used in the CCP version, could be adopted in the new version of the CSA, suggests the paper.

Although many OTC products will never be suitable for a CCP, this does not mean CCP principles cannot be applied to the area, Hodgson suggests. He concludes: “Isn’t it time to blend the experience of both markets and upgrade the financial technology to give firms a higher level of protection and a positive feedback loop to associate higher margin levels with illiquid products and to balance banks enthusiasm for such risky trading?”

Related content

WEBINAR

Recorded Webinar: Sanctions – The new pre-trade challenge for the buy-side

Sanctions screening at the security level is a relatively recent requirement for the buy-side. It dives deeper than traditional KYC and AML screening and is immensely challenging as firms must monitor frequently changing sanctions lists, source up-to-date sanctions data and beneficial ownership data, and integrate these to screen growing lists of potentially sanctioned securities. As...

BLOG

SETL Launches Verafide Digital Credentials Platform for KYC, Other Verification Challenges

Blockchain operator SETL’s Verafide subsidiary has launched its open-source platform for verifying digital credentials and identification on the SETL enterprise blockchain, allowing issuers, holders and verifiers to set up and maintain a digital credentials ecosystem. The Verafide platform is aimed at helping firms fulfill their KYC obligations, adopt more seamless and transparent customer onboarding processes...

EVENT

RegTech Summit London

Now in its 7th year, the RegTech Summit in London will bring together the RegTech ecosystem to explore how the European capital markets financial industry can leverage technology to drive innovation, cut costs and support regulatory change.

GUIDE

A-Team Group’s Valuations Vendor Directory 2009

An indispensable guide to valuations professionals seeking providers of services in the asset valuations market. A-Team Group’s latest release in its series of directories – available for FREE download – focuses on vendors of valuations data, models and analytics. But this is not just another list of firms with their telephone numbers – you can get that...