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CPSS Report New Developments in Clearing and Settlement Arrangements for OTC Derivatives (www.bis.org/publ/cpss77.pdf) Joint Bank of England/ECB Conference ECB, Frankfurt 13 November 2007. Exhibit 1 Overview. 1998 Report Progress Since 1998 Areas Where Further Progress is Needed

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CPSS ReportNew Developments in Clearing and Settlement Arrangements for OTC Derivatives(www.bis.org/publ/cpss77.pdf)Joint Bank of England/ECB ConferenceECB, Frankfurt13 November 2007
exhibit 1 overview
Exhibit 1Overview
  • 1998 Report
  • Progress Since 1998
  • Areas Where Further Progress is Needed
  • Issues Associated with Evolution Toward a More Centralized Infrastructure
exhibit 2 1998 report
Exhibit 21998 Report
  • Settlement Arrangements and Risk Management Practices
      • Largely decentralized processing
      • Bilateral risk management
        • Master agreements (including netting provisions)
        • Collateral agreements
  • Documentation Backlogs
      • Unsigned master agreements
      • Outstanding confirmations
  • Risks Associated with Expanding Use of Collateral
      • Legal risks
      • Operational risks
      • Funding liquidity risks
  • Potential Benefits and Risks of CCP Clearing
      • Risk management challenges associated with relatively illiquid products
exhibit 3 progress since 1998
Exhibit 3Progress Since 1998
  • Documentation Backlogs
      • Unsigned masters greatly reduced
      • Variety of electronic confirmation services now available (SWIFT, SwapsWire, DerivServ, eConfirm)
      • Credit derivatives backlogs have declined markedly since September 2005
  • Collateral Usage and Risks
      • Usage has expanded greatly
      • Legal and operational risks have been mitigated
      • Funding liquidity risks better understood
  • CCP Clearing
      • SwapClear now clears 40 percent of interdealer interest rate swaps
      • Participants emphasize that SwapClear reduces operational risks as well as counterparty risk
      • In September 2006 SwapClear modified its default procedures to recognize relative illiquidity of swaps
  • Other Significant Enhancements to Infrastructure
      • Prime brokerage
      • Multilateral termination services (TriOptima)
      • DTCC’s trade information warehouse
exhibit 4 areas where further progress is necessary
Exhibit 4Areas Where Further Progress is Necessary
  • Confirmation Backlogs for Instruments Other than Credit Derivatives
      • Equity derivatives
      • Interest rate and commodity derivatives
      • Report recommends broader use of economic affirmations and portfolio reconciliations
  • Potential Market Impact of Closeouts
      • Of significant concern to market participants and to policy makers
      • Report concludes that risks can be reduced through more systematic portfolio reconciliations and voluntary terminations
      • Report recommends that market participants should explore further steps to mitigate market impact
exhibit 5 issues associated with a more centralized infrastructure
Exhibit 5Issues Associated with a More Centralized Infrastructure
  • Interoperability and Open Access to Essential Services
      • Interoperability defined as the ability of a system or product to be used in conjunction with other systems and products without imposing unnecessary costs on users
      • CPSS and CPSS-IOSCO standards for payment and settlement systems require “fair and open access”
  • Operational Reliability of Providers of Essential Services
      • Application of CPSS or CPSS-IOSCO standards for operational reliability may be appropriate
  • Safety and Efficiency of Centralized Payment Arrangements
      • CPSS standards for systemically important payment systems or CPSS-IOSCO standards may be relevant
      • Plans for CLS to offer payments services to DTCC’s trade information warehouse is an example of more centralized arrangements
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