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Eurex Clearing to build central counterparty platform for clearing OTC derivatives

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Eurex Clearing, part of the international derivatives exchange Eurex, is examining various formats for the introduction a central counterparty solution for products that are currently hand

Eurex Clearing, part of the international derivatives exchange Eurex, is examining various formats for the introduction a central counterparty solution for products that are currently handled bilaterally on an over-the-counter basis, complementing current US initiatives with a European solution.

The European OTC central counterparty platform could utilise existing Eurex Clearing functionality as well as new functionality for trade and risk management. The business is in discussions with several infrastructure providers over their involvement in a new platform.

The initial product scope will be the credit default swap market, focusing on iTraxx index exposures that are mainly traded out of Europe. The start for the new clearing solution is envisaged for the first half of 2009, and an extension to other asset classes such as equity and fixed income can be handled flexibly according to market demand, Eurex says.

According to the exchange, a European OTC central counterparty platform would increase capital efficiency by reducing balance sheet exposure. It would promote the optimal use of margin deposits, eliminate manual process errors and effectively cover the OTC market’s counterparty default risk.

‘The benefits of our service extension would be increased market stability and capital efficiency,’ says Thomas Book, the Eurex board member responsible for clearing. ‘Customers would profit from straight-through processing, enhanced collateral management and multilateral netting for OTC trades, which currently account for 84 percent of all derivatives traded.’

Eurex says the new service should deliver an optimal solution for effective risk management services and address recent developments in the OTC market, which suggest that concerns about systemic risk due to a backlog of transaction confirmation and potential counterparty default call for improvements in the market’s infrastructure.

Eurex Clearing offers central counterparty services for instruments traded on Eurex, Eurex Bonds and Eurex Repo as well as the Xetra electronic market and floor trading at the Frankfurt Stock Exchange and the Irish Stock Exchange. Eurex Clearing is a wholly owned subsidiary of Eurex Frankfurt and is jointly operated by Deutsche Börse and SWX Swiss Exchange.

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