Banks Expand OTC Clearing

Terry Flanagan

Banks are leveraging their strengths as providers of securities services, such as custody, to clear OTC derivatives for institutional clients.

BNY Mellon Clearing, for example, has joined CME Group as a clearing member firm in order to clear over-the-counter interest rate swaps.

“As a leading custodian and financial services provider, this clearing membership with CME Group represents another significant step forward in providing reliable and efficient clearing pathways for our global client base,” Sanjay Kannambadi, CEO of BNY Mellon Clearing, told Markets Media.

As a result of recent regulatory changes, it is expected that a large percentage of derivatives transactions will be cleared through central clearinghouses. The Dodd-Frank Act passed in the United States last year mandated clearing of standardized OTC derivatives.

As a registered futures commission merchant (FCM), BNY Mellon Clearing provides direct clearing services with major exchanges and central clearinghouses, including the New York Mercantile Exchange and Chicago Board of Trade, which are operated by CME Group, and International Derivatives Clearing Group. The company expects to continue to expand the roster of exchanges it clears through, as well as expand its operations globally.

A clearinghouse sits in the middle of a trade, assuming the counterparty risk involved when two parties (or members) trade, a process called novation; if one of the parties fails, the clearinghouse steps in.

“Each CCP has its processes and procedures the clearing member needs to follow, and as BNY Mellon Clearing expands the roster of exchanges it clears through, its infrastructure will configure to those needs,” said Kannambadi.

While it appears that a large percentage of OTC derivatives transactions will become centrally cleared, for the near term interest among the industry will be focused on interest rate swaps, he said.

“The standardization of OTC derivatives and migration to central clearing should reduce counterparty credit risk and allow better regulatory oversight,” said Kannambadi. ”We serve clients in 36 countries and more than 100 markets. We therefore fully support all global efforts of harmonization and coordination that benefit our clients and the overall market.”


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