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Article: Direct Clearing: another regulatory reform induced labor pain

29 March 2017 | James Parascandola

Following the 2008 Financial Crisis, multiple regional sets of regulations (EMIR, Dodd-Frank) mandated OTC markets migrate from bilateral to cleared processing.  As rules were written and regulations in the U.S. and Eurozone have come into effect over the past 7 years, the Basel Committee on Banking Supervision threw a levered wrench into mandatory client clearing for FCMs which has lead us to a crossroad in derivative market clearing infrastructure.

 

In 2009, while heading credit derivative trading for a large FCM, I began exploring clearing alternatives to the OTC membership model which was borne as a result of my firm not meeting the $5bn ANC requirement set by the CME and ICE for CDS clearing membership access.   Guided by CFTC Rule 22.11, I explored ‘leasing’ a membership from an existing OTC derivative clearing firm.  Via an omnibus limit and look-through membership structure, I would be able to divide my firm’s allocated omnibus limit amongst clearing clients. The CCP and clearing member would know the account’s identity and my firm would act as an

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