16 March 2007

BIS report on clearing and settlement arrangements for OTC derivatives

The BIS Committee on Payment and Settlement Systems issued a report on New developments in clearing and settlement arrangements for OTC derivatives. The report analyses existing arrangements and risk management practices in the broader OTC derivatives market and evaluates the potential for risks to be mitigated by greater use of, and enhancements to, market infrastructure.

The report focuses on the risks created by delays in documenting and confirming transactions; the implications of the rapidly expanding use of collateral to mitigate counterparty credit risks; the potential for expanding the use of central ounterparty (CCP) clearing to reduce counterparty risks; the implications of OTC derivatives prime brokerage; the risks associated with unauthorised novations of contracts; and the potential for significant market disruptions from the closeout of OTC derivatives transactions following the default of a large market participant.

The report concludes among others that institutions need to extend the successful efforts to reduce confirmation backlogs in credit derivatives to other OTC derivative products, using automated systems whenever possible.

As the market infrastructure moves further in the direction of centralised processing of trades and post-trade events, the committee calls for providers of essential post-trade services for OTC derivatives to provide open access to their services. They should also aim to achieve convenient and efficient connectivity with other systems.

Finally, central banks and supervisors will need to consider whether certain existing standards for securities settlement systems, CCPs or systemically important payment systems should be applied to providers of clearing and settlement services for OTC derivatives that are not already subject to those standards.

Press release
Report

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