Cleared derivatives—treatment of client collateral for leverage ratio purposes
Cleared derivatives—treatment of client collateral for leverage ratio purposes

The following Financial Services guidance note provides comprehensive and up to date legal information covering:

  • Cleared derivatives—treatment of client collateral for leverage ratio purposes
  • What is clearing of derivatives?
  • What is client collateral?
  • What is leverage?
  • Leverage ratio—Basel III
  • Leverage ratio—CRR
  • Leverage ratio—PRA Rulebook
  • Industry concerns

BREXIT: As of exit day (31 January 2020) the UK is no longer an EU Member State. However, in accordance with the Withdrawal Agreement, the UK has entered an implementation period, during which it continues to be subject to EU law. This has an impact on this Practice Note. For guidance, see Practice Note: Brexit—impact on finance transactions—Key issues for derivatives transactions and Brexit—impact on finance transactions—Derivatives and debt capital markets transactions—key SIs.

What is clearing of derivatives?

Clearing is a process which eliminates the normal risk that a party to a derivatives transaction will default.

The main parties involved in the clearing process are:

  1. a financial institution known as a clearing house, a central counterparty or a CCP, and

  2. other financial institutions, usually banks or brokers, which enter into a clearing agreement with the clearing house—these institutions are known as clearing members of the clearing house or simply clearing firms

In cleared transactions:

  1. all transactions are entered into by clearing members, which may do this for their own accounts or for the accounts of their clients, and

  2. the clearing house interposes itself between the clearing members who have entered into the transaction, becoming a party to every transaction—each party therefore is exposed to the risk of the clearing house but not to the risk of the other party

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