Clearing derivatives

When a transaction is centrally cleared, that transaction is “given up” or “novated” to a central counterparty (CCP). This means that the two parties entering into the derivative transaction do not have credit exposure to each other as they would have in a bilateral transaction. Instead, the CCP takes margin in exchange for assuming the credit risk of each of the two parties. See Clearing derivatives.

See What is clearing?

Derivatives fit into 2 broad categories, OTC derivatives and exchange traded derivatives. This guidance note sets out how and what derivatives are cleared.

See What derivatives are cleared?

Clearing houses are used to clear derivatives. How this works is set out in this guidance note.

See How does clearing work?

Collateral is required when transactions occur through a clearing house. Margin calls are made for both Initial and Variation margin. What these are and when they are required is set out in this guidance note.

See Margin requirements for cleared derivatives.

The benefits and risks of centrally clearing derivatives is outlined in this guidance note.

See What are the benefits and risks of centrally clearing derivatives?

Settlement of OTC Derivatives

An explanation of what settlement is set out in this guidance note. See Settlement of OTC derivatives.

See What is settlement?

The Global Financial Crisis of 2007 has brought significant reform in relation to the clearing and settlement of OTC derivative contracts. Some of the reforms brought about in the European market are considered in this guidance note.

See Reform of clearing and settlement requirements for OTC derivative contracts.

Not all OTC derivatives are cleared and settled through clearing houses and a significant number are still transacted on a bi-lateral basis and settled under the terms of the ISDA Master Agreement.

See Settlement of uncleared OTC derivative contracts.