Newsletter January 2010: Counterparty risk measures will boost centralised derivative clearing

A key benefit of the Basel Committee’s proposal to strengthen capital requirements for counterparty credit risk (CCR) is that it will also provide a powerful mechanism to induce banks active in over-the-counter derivatives markets to clear as many deals as possible through central counterparties. It has become a major policy objective among regulators in both the EU and US to ensure as high a proportion as possible of over-the-counter (OTC) derivatives transactions become standardised, cleared through multilateral arrangements and traded on exchanges. Incentives for financial firms using central counterparties are being considered on both sides of the Atlantic, while firms undertaking customised, bilaterally cleared transactions are threatened with higher capital charges.