The regulatory drive towards central counterparty clearing of OTC credit derivatives and the necessary limits on this

Regulators have promoted central counterparty clearing of OTC derivatives to reduce the harm from a major dealers failure. CCP clearing also reduces the risk of legal disputes from unconfirmed trades. By standardizing and automating the clearing process, CCP clearing prevents confirmation backlogs. The financial crisis has given CCP clearing of credit derivatives a boost. Documentation and market practice has changed to standardize credit derivatives and aid CCP clearing. While several credit derivatives CCPs are in the works, most are not yet operational and clearing volumes are small. Even if CCP clearing succeeds, a large portion of the credit derivatives market (and the wider OTC derivatives market) will not be standardized. For these transactions, bilateral clearing and counterparty risk management will continue.