Buy Side Challenges for Centralized Clearing of CDS Contracts

12 Pages Posted: 27 May 2010  

Ratan P. Gupta

affiliation not provided to SSRN

Shravan V. Bharathulwar

RBC Capital Markets

Date Written: May 27, 2010

Abstract

OTC derivatives were termed by Warren Buffet as Weapons of Mass destruction, which was earlier much criticized by the financial community. However, these derivatives are now being blamed for the disaster in the financial markets, the bankruptcy of Lehman brothers and the crisis at American International Group. Given the bilateral nature and non standardization of collateral management, OTC derivatives have significant credit risk that may result in the bankruptcy of participating firms. To protect the interest of the OTC derivatives participants, regulatory bodies have given a mandate for the centralized clearing of the CDS contracts.

This paper discusses the implications of centralized clearing of CDS contracts for buy side participants and the challenges it poses for them. We specifically discuss the default protection measures taken by CCPs and the ambiguity surrounding the regulatory changes required to implement those measures. The paper details how buy side firms are protected by the margin and collateral management process in the central clearing environment. Additionally, we highlight the changes buy side firms will need to implement in their technology and operations under the new clearing framework.

Keywords: OTC Derivatives, Central Clearing, CCP, Buy Side, CDS

Suggested Citation

Gupta, Ratan P. and Bharathulwar, Shravan V., Buy Side Challenges for Centralized Clearing of CDS Contracts (May 27, 2010). Available at SSRN: https://ssrn.com/abstract=1616811 or http://dx.doi.org/10.2139/ssrn.1616811

Ratan P. Gupta

affiliation not provided to SSRN ( email )

Shravan V. Bharathulwar (Contact Author)

RBC Capital Markets

30 Hudson Street
Jersey City, NJ 07302
United States

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