Derivatives Clearing Organizations Regulation - White Paper - ISDA - The Economics of Central Clearing: Theory and Practice - May, 2011
White papers addressing issues involving derivatives clearing organizations and other financial clearing entities.
Discussion Papers Series, Number One - May 2011
This paper, which was written by University of Houston finance professor Craig Pirrong, is the first in what will be a series of white papers covering "key topics derivatives, public policy and financial regulation," aimed at "informing debate, encouraging discussion and illuminating public policy options as the derivatives markets evolve."<ref>ISDA Publishes “The Economics of Central Clearing: Theory and Practice,” A Discussion Paper on Clearing Issues. ISDA. Retrieved on June 1, 2011.</ref>
Among the paper's conclusions:
- CCPs can successfully reduce and reallocate counterparty risk through rigorous preparation for, and management of, member defaults;
- CCPs can also create systemic risk, and it is imperative they have strong and conservative risk management and sufficient financial resources to withstand stressed markets. They also require close supervision by regulators;
- The margin policies of CCPs can pose risks to the efficient functioning of the financial system. Mandatory clearing of OTC derivatives will lead to a large amount of liquidity being tied up as margin at CCPs. Increases in margin requirements by CCPs during a crisis could be destabilizing;
- CCPs should generally align control, governance and membership requirements with the interests of participants that absorb their risks and share their losses.<ref>Isda paper tackles the economics of central clearing. Finextra. Retrieved on June 1, 2011.</ref>
The white paper can be found below.