Can OTC derivatives be cleared?

Central clearing is a key feature of global derivatives markets. Almost two thirds of over-the-counter (OTC) interest rate derivative contracts, as measured by outstanding notional amounts, are now cleared via central counterparties (CCPs) – up from around one fifth in 2009.

How are OTC trades cleared?

An OTC derivative trade is considered centrally cleared when it is cleared through a clearinghouse, instead of directly between two counterparties, and both counterparties effectively assume credit risk exposure to the clearinghouse.

What is OTC derivative clearing?

OTC clearing refers to a process under which standardized derivative contracts which relate to over-the-counter transactions will be cleared through an agency established by a stock or commodities exchange.

Are OTC swaps cleared?

Cleared swaps are over-the-counter (OTC) agreements that are eligible to be cleared by ICE Clear U.S., but which are not executed on ICE Futures U.S. (the “Exchange”) either electronically or on the trading floor.

Why OTC derivatives must be cleared?

One effect of such novation is, for both original con- tracting parties, to shift their mutual bilateral credit risk under the transaction to a CCP. Mandatory clearing of certain OTC derivatives is thought to ensure greater stability of the markets in major crisis scenarios.

Which derivatives are centrally cleared?

Centrally-cleared derivatives are negotiated between the counterparties but contain standardized terms and are traded through a central clearing house. The use of standardized terms facilitates the computation of required margin by the clearing house.

What is OTC settlement?

An over-the-counter is a bilateral contract in which two parties (or their brokers or bankers as intermediaries) agree on how a particular trade or agreement is to be settled in the future. It is usually from an investment bank to its clients directly. Forwards and swaps are prime examples of such contracts.

How do OTC derivatives work?

What Is an Over-the-Counter (OTC) Derivative? An over-the-counter (OTC) derivative is a financial contract that does not trade on an asset exchange, and which can be tailored to each party’s needs. A derivative is a security with a price that is dependent upon or derived from one or more underlying assets.

Is a CCP a clearing house?

A central counterparty clearing house (CCP) is an entity that helps facilitate trading in various European derivatives and equities markets. Typically operated by the major banks in each country, CCPs strive to introduce efficiency and stability into various financial markets.