The Enigma of Clearing Buy Side OTC Derivatives

Abstract

Congress is currently debating whether to mandate the clearing of buy side OTC derivatives. Such an action, however, represents a seismic and unproven shift in how OTC derivatives function and how they are traded, processed and assessed, especially with respect to the highly customized products that are developed for the buy side. This article summarizes the various practical concerns implicated in such a requirement and questions whether the clearing requirement will stifle the use of OTC derivatives and whether aggregate risk will be reduced.

Keywords: derivatives, clearing, clearinghouse, regulated central counterparty, exchange, futures

JEL Classification: D40, E44, E52, G28