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EEX — ‘central clearing cheaper than OTC’
09 March 2010
Those who claim it is cheaper to engage in derivatives over the counter than through a central clearing counterparty are not taking the cost of credit risk into account, according to a study by the European Energy Exchange.
Read more:
[EEX]
[European Energy Exchnage]
[central counterparty clearing]
[energy derivatives]
The report finds it is cheaper on average to use a central clearing house, which theoretically eliminates counterparty risk, than it is to buy an OTC derivative and hedge the counterparty risk exposure using a credit default swap.
The study takes account of different costs for OTC and exchange trading. For each, it includes transaction costs and the cost of protection against default. For exchange trading it also includes the cost of liquidity needed for posting additional margin and variation margin.
The calculations assume that the contract is held for one year. During this time, the...
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