Could Bilateral OTC actually be cheaper than CCP Cleared Trades?

A new report by the Office of Financial Research has indicated that CCP clearing might not be as cost efficient as bilateral trading.

The cost of trading bilateral derivatives could be less than its central cleared equivalent despite new and stringent margin requirements, new research has found.

With regulators looking to discourage bilateral OTC derivatives trading with large capital and collateral requirements, the incentivised alternative is to clear through central counterparties (CCP), therefore increasing stability in the financial system.

However, a study by the Office of Financial Research (OFR) has found that there may not be cost incentives to using the new system which counteracts global regulatory initiatives for the reduction of systemic risk.

The revelation could come as a blow to global regulators who have spent years writing and implementing central clearing regulations to reduce systemic risk.

The paper ‘Does OTC Derivatives Reform Incentivise Central Clearing?’ concludes that these cost comparisons are significant factor in banks’ decisions whether to use central clearing or not.

Despite the hike in cost of bilateral, the paper still says that bilateral trading may carry lower capital and collateral costs.

See full article here