Client clearing: Portability between clearing members

Abstract

The financial crises that hit the global capital markets in 2008, beginning with the collapse of Lehman Brothers, had far reaching regulatory consequences as regulators of the G20 countries came together to promulgate new regulations over the OTC derivatives markets, imposing requirements for OTC derivative clearing, reporting and trading. Such regulations have been similarly adopted by various non G20 countries (eg Hong Kong and Singapore). The obligation to clear standardised derivatives, in particular, will have real economy consequences to the end users (non-dealers) of derivatives. Among others, capital implications, cost issues, logistical and regulatory considerations will all come into play. End users will need to consider how best to approach the clearing mandate. Assessing and setting up workable clearing solutions will be paramount, bearing in mind that the cleared derivatives world brings in a slew of new issues hitherto absent in the OTC derivative world. The end user will have to consider its clearing obligations (where applicable), engagement of suitable clearing brokers, handle issues of defaults and margining/collateral, and also consider portability of cleared positions and close-out netting. The author has attempted to set out a broad overview on this topic and provide markers over issues that need to be considered.