Counterparty CreditRiskinDerivativesChapter 17RiskManagementandFinanciallnstitutions3e,Chapter17,CopyrightJohnC.Hull2012
Risk Management and Financial Institutions 3e, Chapter 17, Copyright © John C. Hull 2012 Counterparty Credit Risk in Derivatives Chapter 17 1
ClearingArrangements forOTCDerivatives (Figure 17.2, page 381)Bilateral clearing: usually governed by an ISDAMaster agreementCentral clearing: a central clearing party (CCP)stands between the two sidesBilateral ClearingClearingthrougha single CCPRiskManagementandFinancialInstitutions3e,Chapter17,CopyrightJohnC.Hull20122
Clearing Arrangements for OTC Derivatives (Figure 17.2, page 381) ⚫ Bilateral clearing: usually governed by an ISDA Master agreement ⚫ Central clearing: a central clearing party (CCP) stands between the two sides Risk Management and Financial Institutions 3e, Chapter 17, Copyright © John C. Hull 2012 2
RegulationsStandard OTC transactions must be cleared througha CcP (some exceptions)Nonstandard OTC transactions continue to becleared bilaterally, but with much higher capitalchargesRiskManagementandFinancialInstitutions3e,Chapter17,CopyrightJohnC.Hull20123
Regulations ⚫ Standard OTC transactions must be cleared through a CCP (some exceptions) ⚫ Nonstandard OTC transactions continue to be cleared bilaterally, but with much higher capital charges Risk Management and Financial Institutions 3e, Chapter 17, Copyright © John C. Hull 2012 3
Central Clearing: Role of CCP(Figure17.1,page380)TheOTCTrade5%CompanyCompanyBALIBORRoleofCCP5%5%CompanyCompanyCCPBALIBORLIBORRiskManagementandFinancialInstitutions3e,Chapter17,CopyrightJohnC.Hull20124
Central Clearing: Role of CCP (Figure 17.1, page 380) Risk Management and Financial Institutions 3e, Chapter 17, Copyright © John C. Hull 2012 4
KeyQuestionsHow many CCPsWill there be interoperability? Will benefits of netting increase ordecrease?5RiskManagementandFinancialInstitutions3e,Chapter17,CopyrightJohnC.Hull2012
Key Questions ⚫ How many CCPs ⚫ Will there be interoperability? ⚫ Will benefits of netting increase or decrease? Risk Management and Financial Institutions 3e, Chapter 17, Copyright © John C. Hull 2012 5