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Reforming the OTC credit derivatives market
The regulatory, operational and market infrastructures environment for OTC credit derivatives, especially credit default swaps (CDSs), is changing rapidly. Although final regulation has not yet been approved, it is nevertheless possible to speculate how the credit derivatives and especially the CDS landscape will look once new regulation is implemented. Priority has been given to more transparency and the establishment of one or more central counterparties clearing houses for CDSs. It has been recognised by the industry that introducing a model similar to that for exchanges might wipe out the added value of OTC credit derivatives, undermining their very existence. Most in the CDS market now accept that central clearing will become common practice. The recent turmoil has forced banks to reassess counterparty risk posed by other dealers. They are now much more receptive for centralised clearing of derivatives.The possibility of one global central clearing house for CDS transactions is limited given the wish of both EU and US authorities to strive for a regional solution. An excessive proliferation of (regional) clearing houses is not to be expected, as that would limit the ability of the central counterparty clearing house (CCP) to reduce financial risks through multilateral netting. CCPs, however, may not be able to handle all types of CDS trades given the much customised, non-standardised nature of them. Because of the global nature of the credit derivatives market, there is an urgent need for international regulatory and supervisory cooperation and coordination, as well as a necessity to create global standards for these markets. In the meantime more than one clearing house in the EU has been set up, but that will ask for interoperability.
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Carlo R.W. De Meijer is the founder of MIFSA (De Meijer Financial Services Advisory 2016), an independent advisory start-up on blockchain and related issues. He is an independent economist and researcher. He studied economics at the University of Tilburg (The Netherlands) where he received a Master's degree (cum laude) in international economics in 1977. During his career of almost 40 years he worked at ABN, ABN AMRO and Royal Bank of Scotland. Carlo has held many posts as a senior economist, private investment adviser and researcher. Until October 2015 he worked at the Market Engagement Department of Services Payments at the Royal Bank of Scotland (RBS). Carlo has published many articles on various international and financial topics in many international journals. His main areas of focus were the payments, securities/derivatives, trade finance, supply chain finance, standards and cash management environment and its developments. He was also one of the editors of the third (2013) and fourth edition (2018) of the International Cash Management Handbook in which he has written a large number of chapters. Carlo is a member of the editorial board of the Henry Stewart Journal of Securities Operations & Custody. Since he left RBS, Carlo has remained very active. He is a frequent blogger on LinkedIn, Finextra TreasuryXL and Experfy, focusing on blockchain and distributed ledger technology.