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Why we need central counterparty clearing house 

February 14, 2014
Shyamal Gupta, The Hindu Business Line

In India, futures contracts in commodities are required to be settled through clearing and settlement department of the commodity exchanges and there is no separate central counterparty clearing house. In the light of the recent “exchange collapse”, there is an impending need to guarantee execution of settlements on behalf of the respective counterparties in the exchange where a chain reaction of defaults (breaches of contract) can be prevented.

It is important to understand that an exchange-trading requirement has nothing to do with clearing and they are completely separate issues. The exchange is just the trade execution venue. The only thing that an exchange-trading requirement adds to the clearing requirement is “pre-trade price transparency.”

In India, people tend to think of exchanges as synonymous with clearinghouses as the transactions are cleared through exchanges’ clearing and settlement department, unlike in the US or Europe where mitigation of counterparty risk is achieved by contract “Novation”.

Read more: The Hindu Business Line

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