Funding and pricing OTC derivatives proves treacherous in Australia

As the global over-the-counter derivatives market moves towards central clearing, Australian dealers are preparing to follow suit, in the anticipation that punitive capital charges will be applied to those that fail to catch up. But with the costs of using central counterparty clearing still undetermined, the financial benefit could be less than expected.

Regulators and politicians have embraced central clearing as the great panacea, designed to save the global over-the-counter  derivatives market from a repeat of the financial meltdown in 2008. The use of central counterparty (CCP) clearing platforms is meant to reduce systemic risk and increase transparency, addressing issues in the derivatives industry, which has been described as ‘opaque’ and is blamed for much of the recent global financial woes.

The concept behind CCP central clearing is