File this under unintended consequences: Increasing regulation of clearing in the U.S. and Europe and the growing prevalence of high-frequency trading have combined to push the clearing function from its typically leisurely pace.
As most capital markets players know, under Dodd-Frank, much of the over-the-counter derivatives market in the U.S. will trade through clearinghouses. In Europe, EMIR provides similar rules and the upcoming revisions to MiFID are expected to address this issue as well. This increased systemic reliance on clearinghouses means increased scrutiny and regulation.
As a result, members of clearinghouses will be required to have more rigorous risk management procedures in place by the end of this year. Some yet-to-be-named clearinghouses, dubbed “systemically important” by the Financial Stability Oversight Council, will be subject to even greater oversight.
All this new regulation has lit a fire under clearing houses and they have scrambled to find risk management solutions that will work for them and their clients while fulfilling their obligation to lawmakers. And, increasingly, a big part of these solutions has been real-time clearing.
Real-time clearing, more accurately, is real-time risk management with settlement as soon after a trade as is reasonable. In real-time risk management, the risk for every trade is automatically calculated immediately before and after the trade occurs.