Real-Time Clearing – The New “Race to Zero” (CME Group, TABB Group)

January 2013

KEYWORDS: central clearing, central counterparties, counterparty risk, clearing, credit risk, Dodd-Frank Act, Lehman Brothers, buy-side firm, credit default swaps, CDS, real-time clearing, collateral, capital, margin, futures commission merchant, FCM, swaps, major swap participant, Commodity Futures Trading Commission, CFTC, swap execution facility, SEF, clearinghouse


Will Rhode

  • CME Group
    TABB Group


Clearing over-the-counter derivatives via a central counterparty is nothing new, as both energy and interest rate swaps markets have been clearing trades for nearly a decade, albeit for different market participants and in different ways, according to Will Rhode, a principal with TABB Group, LLC.

While the energy market has been clearing customer trades in real-time, interest rate swaps largely have been clearing dealer-to-dealer trades at the end of each day. Dealers never felt the need to clear in real-time because there was so little perception of intraday counterparty credit risk. Instead, they chose to clear to realize mutually advantageous margin efficiencies.

But the collapse of Lehman Brothers in 2008 and the Dodd-Frank Act changed that, Rhode wrote in a recent report. New rules require buy-side firms be able to access central clearing for interest rate and credit default swaps on a real-time basis.

“This faster clearing cycle will reduce counterparty credit exposure and lead to more efficient collateral and inventory management, freeing capital and lowering margin requirements,” Rhode said. Still, “the path to this environment will require a technology investment by swaps dealers, Futures Commissions Merchants and the clearinghouses themselves.”

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