Market Insight - Over-the-Counter Derivatives under Central Clearing

Jun 26, 2012

The market for Over-the-Counter derivatives is transforming from a market of mostly bilateral contracts to a market where many contracts are executed through a central counterparty (CCP).  As part of this transformation, derivatives market participants now face constraints imposed by the CCPs, notably the need to post and update variation and risk-based margin.  Derivatives risk management in this new paradigm requires an assessment of the liquidity required to meet these margin constraints, and a metric—Liquidity Valuation Adjustment—for the cost of maintaining this liquidity.