Clearing System functions
The following functions are performed within the Clearing System:
• Settlement
• Position maintenance
• Margin calculation
• Deliveries (values, batch allocations) and option exercise allocation
processing.
The TRS and CPS facilities allow a clearing member to reconcile
and monitor the transactions being created and placed into their
account at the clearing house and for which they will be liable for
settlement the next day.
Risk management
A very significant role of the clearing house is managing the risk cre-
ated by the transactions on the exchange. From setting the criteria
for membership of the clearing house to establishing default rules,
using margin systems and requiring daily settlement of resulting
obligations of all members, the clearing house controls the risk that
the exchange, the members and the users of the market face.
We will look at margin in more detail in another chapter, but it is as
much about the risk management tools like margin as it is about the
technology and risk management skills of the clearing house itself.
Globally, clearing houses daily manage trillions of dollars of deriva-
tives transactions and it is a testament to their skills and profession-
alism that when a member does default, it is managed in such a way
that the exchange and its members are not usually affected.
Summary
Without a clearing process the transactions on an exchange would
not get to the stage of settlement. However, the role of the derivative
clearing house is not just about preparing trades for settlement and
then making sure that happens, it is about managing risk as well.
The clearing house is responsible to the exchange and its own
members to protect them from unnecessary risks created by parties
failing to meet their obligations generated by their derivative acti-
vities. It provides a central clearing counterparty to the clearing
members and establishes the rules and regulations under which its
member firms must operate.
The role of the clearing house 43
The clearing house is a regulated and recognised professional risk
management organisation and as such it rightly demands high levels
of professionalism and capabilities from its members, as well as
adequate financial status to be able to meet the obligations of its
activities.
These requirements extend to the quality of systems, the quality
and experience of the management, effectiveness of operational risk
controls and competence in the operations teams.
It is not difficult to see that the teams working within clearing
members must be fully aware of and able to meet the high standards
that the clearing house demands.
That way everyone is protected.
44 Clearing and settlement of derivatives
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