Clearing

Financial Regulation Courses (FRC)

Overview

This course provides a detailed exploration of clearing, focusing on the mechanisms, processes, and key players involved in clearing and settlement within financial markets.
Clearing is a critical component of trading, designed to manage counterparty risk, ensure smooth trade execution, and facilitate the finalization of financial transactions.
The course covers the clearing system's structure, the roles of clearing houses, the types of margin, and the intricacies of managing risks associated with financial transactions.
Learners will gain a robust understanding of how clearing functions across different asset classes and market environments, with a focus on both exchange-traded and OTC products.

Syllabus

1. Introduction to Clearing

Definition and Purpose of Clearing

The role of Clearing Houses

Risks associated with Clearing (Counterparty, Settlement, Market)

2. The Clearing System Structure

Clearing Members: General and Individual

Trade Registration and Matching

Novation: Contract Creation and Risk Transfer

3. The Role of Prime Brokers in Clearing

Key Responsibilities of Prime Brokers

Risk Management and Trade Settlement

4. Central Counterparty Clearing (CCP) and OTC Products

Clearing OTC Products through Exchanges

Mutual Offsets and Clearing House Guarantees

Managing Counterparty Risk in OTC Derivatives

5. Margin in Clearing

Initial Margin, Variation Margin, and Maintenance Margin

Methods of Determining Margin (SPAN, TIMS)

Margin Calls and Managing Collateral

6. Clearing Fund and Default Risk Management

The Role of the Clearing Fund in Default Scenarios

Managing Extraordinary Risks in Market Fluctuations

Stress Testing and Financial Backing of Clearing Houses

7. Collateral Management and Acceptable Collateral Types

Use of Cash, Bonds, and Other Collateral

Collateral Haircuts and Risk Adjustments

Collateral Management Systems and Agreements

8. Settlement and Position Limits

Price and Position Limits in Markets

Settlement Risk and Position Management

Learning Objectives

Understand the Clearing Process: Explain the key purposes and mechanisms of clearing in financial markets, including how clearing houses function as intermediaries.

Identify the Structure of the Clearing System: Differentiate between the roles of clearing houses, clearing members, and non-clearing members and how they interact within financial markets.

Assess the Role of Prime Brokers: Understand the responsibilities of prime brokers in clearing, including trade execution, risk management, and client relationship management.

Apply Margin Requirements: Comprehend the various types of margin (initial, variation, and maintenance), how they are calculated, and their role in mitigating risk within the clearing system.

Evaluate the Importance of Clearing Funds: Discuss the role of the clearing fund and how it is utilized in cases of member defaults to prevent systemic risk in the financial system.

Manage Collateral and Credit Risks: Identify the types of collateral accepted in clearing and the risk management techniques used to secure transactions, including credit support agreements and collateral haircuts.

Analyse OTC Clearing: Compare exchange-traded and OTC clearing systems, including the benefits of centralized clearing and the challenges associated with clearing OTC products.

Understand Settlement and Position Limits: Explain how price and position limits are imposed to prevent market manipulation and ensure the stability of financial markets.

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Analysis

Delivery and Settlement

Analysis

Clearing

Advisory

Conduct of Business Sourcebook of the FCA (COBS)

Advisory

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