Is the role of a CCP in reducing systemic risk in OTC derivatives markets being overblown?

22 January 2009

Adsatis, a London-based consultancy for the financial markets, today has published the first of three thought-leadership articles entitled “Credit Exposure Management in a Post-crisis World.” Part one challenges the benefits of central clearing for OTC credit derivatives in reducing systemic risk, questioning whether the current crisis would be any different if such a service was in operation.

The first article, “A central counterparty for OTC credit derivatives – are we over estimating the importance?” examines the real benefits and untold disadvantages of clearing OTC credit derivatives via a central counterparty, and who really benefits from this change in post-trade processing.

Adsatis consultant and author of the article, Bill Hodgson said;

“The benefits of a CCP for OTC Credit products have been widely advertised as reducing ‘systemic’ risk in the capital markets. Our contention is that changing the processing of one high volume product makes no difference to the entire capital markets system, leaving the wider system unaffected. The inability of any central counter party to take on the risk mitigation of complex structured credit products, means the CDOs and SIVs at the centre of the current crisis remain untouched by this initiative.”

Subsequent articles will focus on current practices in bilateral OTC derivatives exposure management, and finally on the lessons we can learn from weather forecasters and a strategy for research into the global capital markets risk management environment. The articles will be published in conjunction with DerivSource, the online community and information source for professionals active in derivatives processing, technology and related services.

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