From the May 01, 2009 issue of Futures Magazine • Subscribe!

Complex margining

As regulators in the United States and Europe put pressure on broker-dealers to clear their OTC business, some within the exchange community have worried that the business could be a short-term carrot with a long-term stick – which is why Eurex, NYSE.Liffe, CME Group, and now LCH.Clearnet (which joined the race late) are either creating separate entities to act as default funds for the CDS business or have already done so.

Margining of CDS positions isn’t done the way futures are, either. In fact, each trading member will have its own, unique margin requirements — and the requirement will increase the more they trade, as exchanges assume the higher activity indicates a higher underlying concentration of risk.

ICE.Clear is the only clearinghouse not pursuing that strategy and the only one with the backing of all major dealers active in the sector.

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