Knowledge Base
Describe the objectives and operating rules of a clearing house
Which authorities are responsible for the supervision of European CCPs such as LCH SA?
Supervision of European CCPs such as LCH SA is shared among several authorities. The ACPR is responsible for licensing and prudential supervision, the AMF approves operating rules, and the Banque de France oversees them as market infrastructure. An EMIR college also brings together the authorities of Member States with an interest in the CCP.
What is the primary obligation of clearing house members regarding initial margins?
Clearing house members must deposit initial margins covering the residual risk at position entry. This obligation is accompanied by daily variation margin calls, and even intraday during periods of high volatility. These rules are imposed by EMIR (Article 37) and the AMF General Regulation.
What is the primary objective of counterparty risk reduction in a clearing house under the EMIR regulation?
The primary objective of counterparty risk reduction is to decrease the financial system's exposure to chain contagion risks. This is achieved through risk mutualization via the default fund, contract standardization, and daily mark-to-market valuation enabling daily margin calls. According to ESMA's impact assessment (2015), these measures are expected to reduce the volume of non-cleared derivatives by 49%.
What are the concrete mechanisms used to reduce counterparty risk in a clearing house?
The concrete mechanisms to reduce counterparty risk include risk mutualization via the default fund, contract standardization that promotes liquidity, and daily mark-to-market valuation that enables daily margin calls. These measures aim to reduce exposure to chain contagion risks, as indicated in the EMIR regulation.
Regulation 2021/23 on the recovery and resolution of CCPs only provides for last-resort intervention tools such as cash calls.
Regulation 2021/23 on the recovery and resolution of CCPs provides not only last-resort intervention tools such as cash calls, but also variation margin haircutting and the transfer of critical functions. These measures aim to ensure financial stability in the event of a crisis.
Multilateral netting
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Multilateral netting is a mechanism that significantly reduces participants' treasury requirements by replacing the multitude of bilateral relationships with a single counterparty (the CCP). This drastically simplifies operational management and enables consolidated exposure monitoring.
Mandatory central clearing for standardized OTC derivatives was mandated by the G20 Pittsburgh summit in 2009.
The G20 Pittsburgh summit in 2009 indeed mandated central clearing for standardized OTC derivatives, which was implemented in Europe through the EMIR regulation in 2012. This measure aims to strengthen systemic financial stability by absorbing initial shocks and preventing the chain reactions that characterized the 2008 crisis.
Categorize items by dragging them to the appropriate zones
Items to categorize:
Regulated financial institutions
Public institutions
Investment bodies
Entities eligible for membership in a clearing house include credit institutions with their registered office in France or in the EEA, authorized investment firms, central banks, and certain collective investment schemes. These categories are defined by the French Code monétaire et financier (Article L.440-2).