The European Association of Central Counterparty Clearing Houses (EACH) has published a paper that indicates its support for the introduction of central clearing counterparties for the OTC derivatives markets. The industry association believes a CCP can serve as part of the blueprint to effectively mitigate counterparty risk and improve operational efficiency in the OTC derivatives market across asset classes and products.
The paper explains the reasons behind EACH’s support of the industry initiatives to establish a CCP for the credit default swap (CDS) market and a number of recommendations for the “sound market organisation” of OTC derivatives in general.
The main benefit of CCPs in this market is to ensure market integrity, says the paper. This can be achieved via: “the mitigation of counterparty default risk through interposing itself as counterparty to each trade as, the market counterparty of unquestioned creditworthiness; the multilateral netting of gross market risk down to significantly lower levels of net market risk; the neutral, transparent valuation of open positions; and the daily full collateralisation of the remaining net market risk.”