Protecting collateral contributions under the mandatory clearing regime

Abstract

The crisis has driven authorities to shore up the financial system against major credit events, but the bricks of this fortification are the assets of investment firms. The funds they commit to buffering the system are themselves exposed to loss unless they are properly managed. To keep their securities safe, market participants must evaluate the cost of connecting to central counterparties (CCPs) directly or indirectly. If connecting indirectly, they must decide how best to keep secure the assets they entrust to CCPs, via their clearing broker. Every option differently affects cost, capital requirements, the level of commitment to default funds and operational complexity. With so many moving parts, every market participant must establish its preferred model and set in motion the wheels to get connected as soon as possible. Making a poor decision will prove expensive, and time is pressing.