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What are non-centrally cleared derivatives?

Non-centrally cleared derivatives are defined as derivatives that are not cleared through a central counterparty. Derivatives include a wide assortment of financial contracts, including forwards, futures, swaps and options 4.

Are OTC derivatives centrally 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 are cleared and non-cleared derivatives?

When a transaction needs to be cleared centrally, corporate users are not able to access the CCP directly. Instead, only clearing members of a designated CCP are able to clear an OTC derivative directly with the CCP. Non-cleared transactions are agreed bilaterally between a buyer and seller.

What is non-cleared margin rules?

The Non-Cleared Margin Rules require counterparties in non-cleared over-the-counter (OTC) derivative trades to exchange initial margin (IM) and variation margin (VM) with each other.

What is OTC in derivatives?

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. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates, and market indexes.

What are centrally cleared derivatives?

A central clearing counterparty (CCP), also referred to as a central counterparty, is a financial institution that takes on counterparty credit risk between parties to a transaction and provides clearing and settlement services for trades in foreign exchange, securities, options, and derivative contracts.

What derivatives are centrally cleared?

Classes of OTC derivatives subject to central clearing obligation

Asset Class Classes
Interest Rate Basis, Fixed-to-float, FRA and IOS in EUR, GBP, JPY and USD
Interest Rate FRA and fixed-to-float swaps in NOK, PLN and SEK
Equity Lookalike/Flexible equity derivatives and CFD
Credit Index Credit Default Swaps

What is OTC cleared?

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.

What does non cleared mean?

Filters. A member of an organized exchange that does not have a trade clearing operation to match up buyers and sellers of futures and options contracts. In order to settle its trades, it has to pay a fee to another firm that is a clearing member.

What is initial margin for OTC derivatives?

Initial margin (IM) is collateral collected and/or posted to reduce future exposure to a given counterparty as a result of non-cleared derivative activity. Whilst there is a recognised process within exchange traded and cleared derivatives, this is largely a new process for non-centrally cleared OTC derivatives.

Why are non-cleared OTC derivatives so important?

Non-cleared OTC derivatives will continue to play an important role in many industries and in many areas of economic activity. They are used extensively by corporations, investment and pension funds, governments and financial institutions to run their operations and to manage risk.

Why do we need initial margin for OTC derivatives?

Initial Margin (IM) is intended to protect the non-defaulting party to a non-centrally cleared OTC trade from a loss incurred when replacing the trades due to market movements after the other party defaults, including bid-offer increases. The new framework mandates the use of IM for all non-cleared OTC derivatives.

How did the great financial crisis affect OTC derivatives?

The 2007-09 Great Financial Crisis exposed structural weaknesses in the over-the-counter (OTC) derivatives market. This led the Group of Twenty (G20) to initiate a reform programme to reduce the systemic risk posed by OTC derivatives.

How are OTC derivatives regulated in the EU?

In Europe the rules will be implemented within the new EMIR directive of the EU. Since Pittsburgh, new regulations have accelerated the separation of the OTC derivatives market into a cleared and non- cleared market, with the former focusing on the `standard’ OTC derivatives.