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OTC clearing: Blinded by the light!

There is a regulatory onslaught approaching from both sides of the Atlantic and Asia,  that will  have a profound impact on the OTC derivatives market. However, with the Dodd-Frank reform in the US and the deadline for compliance nearing, there is still a significant amount of uncertainty around what the final implementation of the regulation will contain. The use of central counterparties may be perceived as a “new paradigm” to mitigate counterparty credit risk for OTC derivatives contracts, but we cannot deny that there is currently deep concern amongst market participants in the US, Europe and Asia that regulatory reforms are still “work in progress”. With the emergence of more and more regulatory gaps between the US and the EU, that anxiety is understandably growing.

What we must not forget however, is that in whatever shape or form, OTC clearing regulation is coming and it will be here to stay. Short term action or indeed inaction is certainly not the solution to regulatory discrepancies. Ultimately, any active member of the global derivatives markets will be required to comply with a common set of standards and operational procedures. As a result, all active participants need to carry out an assessment now of their current landscape to have a clear view on where they stand and where they would like to be, post regulatory shake up.

For those participants and stakeholders who wish to continue in the market, doing nothing is not an option, and to delay will result in lost opportunities. Others may be paralysed into doing nothing by fear of change. However, the last thing the industry needs right now is to become the proverbial rabbit “caught in the headlights” of regulation.


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