Strategies to manage risk accumulated in CCPs unclear, says ISDA panel

The strategies that global regulators will use to manage the risk that can potentially accumulate in central counterparties (CCPs) have not been clarified, a panel of market experts stated at the recent meeting of industry organization the International Swaps and Derivatives Association (ISDA).

The strategies that global regulators will use to manage the risk that can potentially accumulate in central counterparties (CCPs) have not been clarified, a panel of market experts stated at the recent meeting of industry organization the International Swaps and Derivatives Association (ISDA).

CCPs serve to manage counterparty risk, which is the risk that one party in a derivatives contract will default on its obligations. Once the two entities agree to the contract, it is registered with the clearing house. When it is time for the derivatives transaction to be cleared, the CCP acts as a buyer for the seller and as a seller for the buyer. Essentially, the clearing house takes on the counterparty risk.

"There are still no resolution plans for CCPs and it is murkier now that clearing houses have moved away from the utility model," Athanassios Diplas, senior adviser to the ISDA board, said at the meeting, according to International Financing Review.

A broad array of derivatives regulations enacted in jurisdictions across the world have been created in an effort to push more transactions of these financial instruments onto exchanges and require that they be cleared, after the Group of Twenty nations resolved to take action to lower systemic risk in 2009.

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