Project by Praveen P. Mishall
Welingkar Institute
Apart from Markit pricing Eurex Clearing also plans to have their own Eurex clearing pricing team which will be collecting data from members (quotes, traded levels & EOD pricing), data extracted from various data vendors, cross checking with different sources, having a time series check (comparing current spread with the past time series) and if no satisfying data is available obtaining theoretical quote to obtain the CDS spread.
Risk Management Model There are legal, capital, operational requirements etc. and each clearing house has its own risk management model. The legal requirement checks whether the CDS contracts fits in the regulations governed by regulatory bodies, like Eurex clearing will be checking whether the clearing member is EU domiciled. And the clearing house for US will have corresponding checks. The clearing house will be asking to fulfill the capital requirements. They will be asking for margins and collaterals. This again varies as per clearing house. CME clears a diverse set of products under the protection of its guaranty fund, which tends to provide overall capital efficiencies whereas Eurex clearing has separate dedicated clearing fund for CDS business. All the clearing houses ask for daily mark-to-market margin, initial margin, and guarantee fund.
End of Day Processing All clearing houses will provide reports to the clearing members of their current positions (pending, rejected, accepted, etc.), margin summary, collateral reports, settlement instructions etc.
Criticism on Central Counterparty: As per the paper written by Darrell Duffie and Haoxiang Zhu of Stanford University (“Does a Central Clearing Counterparty Reduce Counterparty Risk?”), the use of CCP won’t serve the purpose of reducing the risk in CDS market. As per the research the market for CDS is not big enough to substantiate the need for CCP. Although Darell Duffie, a member of the Financial Advisory Roundtable of the New York Federal Reserve Bank, supported the idea of CCP and still supports the same but with some reservations regarding the implementation of CCP. He says the market for CDS is small
CDS | Central Counterparty Settlement
MMS 2008-10
70