Certainty of clearing: Creating a credit-checking tool for OTC derivatives

Abstract

As regulation moves the swaps markets toward mandatory clearing, participants need an efficient real-time solution to confirm buy-side participants have sufficient credit with their clearing members to ensure their trade will clear. There are several ways that this process, known as ‘certainty of clearing’, can take place The author believes that the ideal way to achieve certainty of clearing is to do the credit check on the trade execution platform itself, by using a flexible hybrid combination of ‘ping’ and ‘push’ protocols. The electronic venue receives uploads of credit limits (push) from the clearing member for a given buy-side customer at the beginning of the trading day, and the clearing member is notified (ping) once the client reaches a pre-set tolerance limit (for example, at 75 per cent). The limit stored within the venue then can be adjusted if the clearing member wishes to do so. Since some execution venues, such as Tradeweb, already have relevant infrastructure, connectivity and relationships, they are well positioned to lead in the provision of pre-trade credit-checking technology to the industry.