Regulation of indirect clearing of derivatives

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

  • Regulation of indirect clearing of derivatives
  • What is clearing of derivatives?
  • What is indirect clearing of derivatives?
  • Derivatives terminology
  • Indirect clearing of ETDs
  • Indirect clearing of OTC derivatives
  • EU and UK regulatory framework
  • EU MiFIR and UK MiFIR
  • Indirect clearing RTS under EU/UK EMIR and EU/UK MiFIR
  • More...

Regulation of indirect clearing of derivatives

What is clearing of derivatives?

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

The main parties involved in the clearing process are:

  1. a financial institution known as a clearing house, 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

Clearing members do not need to be concerned with the identity or credit quality of their clearing member counterparties, but only with the credit quality of the clearing house. The clearing house, however, is exposed to the credit risk of the counterparties between which it is interposed. The main ways in which a clearing house manages this risk are by:

  1. entering into clearing agreements only with clearing members who meet stringent financial criteria, and

  2. taking collateral (usually known as margin) from

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