THE FUTURE OF CLEARING
The GFC has been followed by a decade of increasing transparency and stability in financial markets. There is consensus that substantial progress has been made in meeting G20 objectives, with central counterparties now playing a pivotal role in addressing systemic risk. Additionally, the development of real-time technology and the advantages of economies of scale and network economies have influenced the processing and settlement speed, simplicity and availability of trade and post-trade arrangements.
However, as innovation and global connectivity continue to drive the financial markets, new opportunities and challenges arise for CCPs to maintain a robust ecosystem that delivers on its core ambitions.
Some of the areas of focus for the following years are:
- Time reduction in settlement transactions: the transformational technological shift has allowed trading processes to occur in real-time. However, payment and settlement still need several days to process, thus limiting liquidity and putting stress on balance sheets. Increasing operational efficiencies on the settlement process would directly reduce settlement risk and collateral requirements, providing further incentives for central clearing;
- Incentives for expansion of the cleared product set: OTC IRDs and CDS have experienced a large growth in clearing since the G20 mandate. Conversely, non-mandated FX and equity products remain largely uncleared, and developments in these areas warrant close attention. Implementation of regulatory incentives and further recognition of the risk management benefits could trigger additional portions of the market to move towards clearing, to the extent of standardisation is possible;
- Supporting the developing of emerging capital markets: CCPs perform a risk mitigation role in most developed markets. In contrast, emerging markets still lack the cost synergies and the investment base to stimulate the effective, practical and appropriate risk management standards, often relying on the CSD model to enable market integrity via performing risk mitigation roles. Future development of the CCP model could include expanding the scope to promote greater involvement of the international trading community in emerging markets while ensuring the highest quality standards.
For further information on the evolution of OTC derivatives and the future of clearing, please see: Progress and Initiatives in OTC Derivatives – A CCP12 Report