Central clearing configurations : implications for South African derivative markets

Abstract

After the financial crisis of 2008-2009, central counterparties (CCPs) emerged as an important mechanism to mitigate against counterparty credit risk and stem the spread of contagion in a time of crisis. Trading in derivative instruments, especially opaque, illiquid and complex in-struments, were seen as the cause of much of the quagmire in which the global economy found itself. At the Pittsburgh summit in 2009, the Group of 20 Nations (G20) made some fundamental commitments on the reform of international derivatives markets. One of the main commitments was to have standardised OTC derivatives cleared through central coun-terparties by the year 2020. In South Africa, the only CCP is the clearing house for exchange traded derivatives operated by the Johannesburg Stock Exchange (JSE); five major South Af-rican banks are direct clearing members of JSE Clear. Most of the standardised OTC deriva-tive transactions are interest rate, and to a much lesser degree forex, in nature. The London Clearing House (LCH) clears the vast majority of centrally cleared ZAR interest rate swaps. All South African banks clear most of their trades executed with foreign counterparts at LCH but only one has a subsidiary that is a direct clearing member of LCH. There is a large amount of ZAR interest rate swap activity in SA which is not centrally cleared. This study examines the efficiency and dynamics of central clearing in this setting. It further notes the recent de-velopments in the current central clearing landscape and compares aspects thereof in South Africa to international CCPs. The framework developed by Duffie & Zhu (2011) is then used to examine efficiencies of different configurations of central clearing of derivatives in the South African context.