Clearing

Learn about clearing processes, margin requirements, and risk management in financial markets with our comprehensive clearing course.

Category in Analysis


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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