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Central Counterparty Clearing Houses and Financial Stability,” Financial Stability Review

By Bob Hills, David Rule, Sarah Parkinson, Market Infrastructure Division, Chris Young, Foreign Exchange Division and Bank Of Engl


Clearing houses have often been in the shadows of the derivatives exchanges with which they are typically associated. But this may be changing. There are signs that the central counterparty services that clearing houses provide could be an increasingly important part of the modern financial landscape, alongside exchanges and other trading mechanisms. The London Clearing House (LCH), for example, is about to extend its services to new markets, previously uncleared in the UK. Before the end of 1999, LCH plans to launch a central counterparty service for the over-the-counter derivatives market (Swapclear) and for the bond repo market (RepoClear); the latter is one of several plans for clearing European government bond repos. In addition, it is envisaged that trades on the joint London Stock Exchange/Deutsche Börse trading platform will be cleared by some form of central counterparty. Central banks have a core interest in understanding the ways in which these developments change the distribution of risk and the possibility of systemic risk within financial markets. 1 This article, taking a general perspective, considers why demand for central counterparty services has arisen from market participants, how central counterparties alter the distribution and form of risk, the characteristics of markets for which they might be suitable, and their implications for financial stability more generally. The evolving role of central counterparty clearing houses A clearing house acts as a central counterparty when i

Year: 1999
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