Description

OTC derivative markets have undergone major structural changes in recent years. Mandatory central clearing has created surging demand for clearing services. Simultaneously, explicit balance sheet restrictions and capital costs have been imposed on financial institutions engaged in OTC derivatives.

On the basis of current trends, banks taking on new OTC clearing clients will be highly selective and some will move away from providing third‐party clearing services altogether. Risk management issues and clearing broker risk are bound to rise as clearing services providers retreat. Charges seem certain to increase significantly because of the banks’ cost pressures as well as the supply‐demand imbalance and, in all likelihood, the full upward adjustment in charges for clearing services is a long way from being complete.

For these reasons, the acquisition of clearing memberships in order to ‘self‐clear’ has already become, and will increasingly be seen as a rational and potentially a necessary path to evaluate.

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