Market Insight - Over-the-Counter Derivatives under Central Clearing
Research Paper
June 26, 2012
Preview
The market for Over-the-Counter derivatives is transforming from a market of mostly bilateral contracts to a market where many contracts are executed through a central counterparty (CCP). As part of this transformation, derivatives market participants now face constraints imposed by the CCPs, notably the need to post and update variation and risk-based margin. Derivatives risk management in this new paradigm requires an assessment of the liquidity required to meet these margin constraints, and a metric—Liquidity Valuation Adjustment—for the cost of maintaining this liquidity.
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