During the height of the great depression that affected the economies of great nations, several financial regulations and solutions to threats affecting economic stability has been formulated. The implementation of the Dodd Frank Act and the formation of the Group of Twenty (G20) are one of the preventive measures done to prevent the crisis from ever occurring again and to protect international laws and regulations of trading. One of ambitious moves done by the G20 is to transfer the majority of the bilateral OTC derivatives clearing to a centrally cleared model. The move caused many nations to pass new laws and regulations to ensure that the transition is smooth, more secure and provides other benefits to trade parties to entice traders to conform to new standards of OTC derivatives clearing. Financial institutions such as banks, clearing houses and data providers have also presented new rules and models to follow to decrease risks and complexity of the trade.
The idea of presenting a centralized OTC derivatives clearing seems to be ideal at first but as the movement start, clearing houses find it a challenge when creating end-user agreements for transferring custody of goods from a client to a clearer or from the clearer to the client. This is because the types of trades are varied and some agreements may not be applicable to some types of underlying assets. Policy makers suggest that to ensure a successful transfer of OTC derivatives clearing to a centralized one, several guidelines should be met.
One of the guidelines is to ensure that the trade is as simple as possible. One of the reasons why over the counter derivatives is popular is the simplicity of trade. When both parties agree with specific conditions through phones or other means of communication, the trade will then commence and bilateral OTC derivatives clearing will be done. If the new centralized OTC derivatives clearing require more time and complex procedures, then many traders will opt out.
Providing good incentives for both parties when performing an OTC derivatives clearing is also important. Example of incentives is to minimize the risks when performing OTC derivatives. In addition to transparency and the legality of trades, traders should find other economic incentives brought by the transition such as indirectly increasing the growth of the business.