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Article: The real cost of clearing

21 February 2018 | John Lund
   

Derivatives clearing has been mandated in Europe for the buyside (Category 2) for over a year, since May 2016, with the start of clearing for GBP, USD, EUR and JPY IRS.


Whilst the mandate for Category 3 participants has been delayed (to 2019 or possibly beyond), various drivers are accelerating
the shift from bilateral to cleared:

  • The emerging spread between bilateral and cleared (due to increased regulatory capital pressures on the dealers for bilateral trading), favouring clearing even when not mandated
  • Recognition of the opportunity for margin efficiencies through selectively clearing to reduce cleared IM liability by offsetting mandated positions
  • The potential for operational efficiencies through moving flow from bilateral to cleared (setting up a clearing infrastructure carries a large fixed cost independent as to the extent of derivatives cleared).

The focus for most participants since May 2016 has been to establish a working clearing

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