Eurex Clearing evaluates different formats to introduce a central counterparty (CCP) solution for products which are today handled bilaterally over the counter (OTC). It aims to complement current US initiatives with a European solution. The European OTC CCP platform could utilize existing Eurex Clearing functionality as well as new functionality for trade and risk management. Eurex Clearing is in discussions with several infrastructure providers concerning their involvement in a new platform. The initial product scope will be the credit default swap (CDS) market, focusing on iTRAXX index exposures that are mainly traded out of Europe. The start for the new clearing solution is envisaged for first half of 2009. An extension to other asset classes (e.g. equity, fixed income) can be handled flexibly according to market demand.
A European OTC CCP platform would increase capital efficiency by reducing balance sheet exposure. It seeks to promote the optimal use of margin deposits, eliminates manual process errors and effectively covers the OTC market’s counterparty default risk. "The benefits of our service extension would be increased market stability and capital efficiency. Customers would profit from straight through processing, enhanced collateral management and multilateral netting for OTC trades which currently account for 84 percent of all derivatives traded", says Thomas Book, responsible for Clearing on the Eurex Executive Board.
The new service can deliver an optimal solution for effective risk management services and is designed to address recent developments in the OTC market which suggest that concerns about systemic risk due to the backlog of transaction confirmation and potential counterparty defaults require improvements in the market’s infrastructure.
