Skip to main content
Disciplines
Automotive Business IT + Informatics Construction + Real Estate Electrical Engineering + Electronics Energy + Sustainability Insurance + Risk Finance + Banking Management + Leadership Marketing + Sales Mechanical Engineering + Materials
Events
DE
EN
Books
Journals
Topic Page
Marketing
Start single access now
Access for companies
EXTENDED SEARCH
Log in
Top
Published in:
Exchange Organizations: Thoughts and Reflections Read chapter Read first chapter

2017 | OriginalPaper | Chapter

5. Clearing

Author : Thomas Laux

Published in: Equity Markets in Transition

Publisher: Springer International Publishing

Log in

Activate our intelligent search to find suitable subject content or patents.

search-config
loading …

Abstract

Once a trade is executed, further actions are essential to finally settle it. At this point in the value chain—that is, post-execution—clearing is the next step. Clearing is the general term for the risk management and operational processing needed to ensure that the commitment made from the trade execution is concluded on the settlement side, a final step involving the exchange of shares for money and other critical procedures. In this final step, a central counterparty, or CCP, steps in between the original trading parties, becoming the new seller to the original buyer, and the new buyer to the original seller.

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

  • über 102.000 Bücher
  • über 537 Zeitschriften

aus folgenden Fachgebieten:

  • Automobil + Motoren
  • Bauwesen + Immobilien
  • Business IT + Informatik
  • Elektrotechnik + Elektronik
  • Energie + Nachhaltigkeit
  • Finance + Banking
  • Management + Führung
  • Marketing + Vertrieb
  • Maschinenbau + Werkstoffe
  • Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

  • über 67.000 Bücher
  • über 340 Zeitschriften

aus folgenden Fachgebieten:

  • Bauwesen + Immobilien
  • Business IT + Informatik
  • Finance + Banking
  • Management + Führung
  • Marketing + Vertrieb
  • Versicherung + Risiko




Jetzt Wissensvorsprung sichern!

inform now
previous chapter Secondary Market: Trading, Price Discovery, and Order Matching
next chapter Securities Services: Settlement, Custody and Financing
Footnotes
2
The Group of Twenty (also known as the G-20 or G20) is an international forum for the governments and central bank governors from 20 major economies.
 
3
The Committee on Payment Systems and Settlements, since then renamed to Committee on Payments and Market Infrastructures, and the International Organization of Securities Commissions are international bodies which bring together national and regional regulators and central banks to coordinate and outline joint policies and standards.
 
5
Legal trade means that there is a contractual obligation between two parties.
 
6
In the agency model, the end user of the trade legally holds a position at the CCP. The direct clearing member guarantees the trade and acts as agent of the client towards the clearing house, wherefrom the name.
 
7
LSOC = Legal separated, operationally comingled, i.e., a form of “tagged” omnibus segregation.
 
8
Compression is basically the replacement of (mostly) offsetting trades, and possible a large group of them, with a lower number of trades. In some cases, lower number is taken to mean smaller notional.
 
10
The CCP’s “waterfall” is the sequence in which financial resources provided by the members, CCP, and possibly other stakeholders are used to cover losses from a member default.
 
11
A prudential authority is responsible for oversight of capital markets and their actors in a macro-sense. Often, a prudential authority defines its responsibilities in terms of “systemic risk,” that is to say, risk which is realized through the interaction between various institutions and their behavior, rather than the (micro) regulation of a particle entity. Following on from the financial crisis in 2008, various systemic risk boards, such as the FSOC or ESRB, have been created, and other regulators, such as the Bank of England, have developed a function to address this feature of markets.
 
12
Secondment means the temporary movement or placement of an individual into another role or position.
 
13
Invoicing back means that the original counterparty to the trade is requested to take up the position directly, essentially removing the CCP from any further obligations. Allocation often denotes a similar process, although trades are not returned to the original counterpart, but across non-defaulting members of the CCP. Allocation is often performed with the members taking over obligations to rebalance the CCP in proportion to their activity.
 
14
Mutualization is the use of common funds, often called the default fund. Using funds from non-defaulting members is rare and considered a grave event.
 
15
Given the preference most CCPs and clearing members have for a “defaulter pays” model, most CCPs have higher confidence levels; for instance LCH.Clearnet uses a 99.7 % confidence level, and most CCP’s back-testing reveals de facto higher confidence levels on a regular basis. The European Market Infrastructure Regulation requires that CCPs maintain at least 99.5 % confidence level for OTC derivatives such as interest rate swaps.
 
16
A concentration add-on is further margin charged to account for the discount that trading out of a large position is expected to cause. For example, as it is harder to sell 100,000 shares than 10,000, a CCP should charge a member more per share for the first position. This key feature is important to keep orderly liquidations and mitigate losses beyond the defaulter’s collateral.
 
17
Title transfer denotes the legal transfer of full ownership. In this case, the CCP becomes the owner of the cash.
 
19
Many CCPs were, and some still are, jointly owned by their members. Each member often holds shares in the CCP based on their volume at the CCP.
 
Literature
Eurex Clearing / Deutsche Börse Group (2014): How central counterparties strengthen the safety and integrity of financial markets. Frankfurt / Main: Deutsche Börse AG.
Robert Schwartz, Reto Francioni. Equity Markets in Action, 2004
Peter Norman. The Risk Controllers: Central Counterparty Clearing in Globalised Financial Markets. 2011
Jon Gregory. Central Counterparties: Mandatory Central Clearing and Initial Margin Requirements for OTC Derivatives. 2014
Metadata
Title
Clearing
Author
Thomas Laux
Copyright Year
2017
Book
Equity Markets in Transition

Print ISBN: 978-3-319-45846-5

Electronic ISBN: 978-3-319-45848-9

Copyright Year: 2017

DOI
https://doi.org/10.1007/978-3-319-45848-9_5