Resumen

This thesis assesses the implications that netting practices, collateralization and centralization of the risk in Central Counterparties (CCPs) have on the structure of Over-the-Counter (OTC) derivative market and determine when those practices are plausible alternatives to protect OTC market against counterparty risk.
Benefits and disadvantages are addressed from a general and a specific perspective. The general scope discusses the positive and negative implications that affect the structure of OTC derivative market as a whole, while the specific scope include the direct implications for market participants from a narrower point of view.
The theoretical framework is based mainly on literature from books, journal papers, regulative approaches from financial authorities and statistical data from the BIS and ISDA. The outcomes from the three assessments are:
(i) Bilateral and multilateral netting is justified when the reduction of counterparty credit risk and cost advantages obtained from closing-out positions are greater than the legal risk and operational risk;
(ii) The risks and costs derived from collateral are justified when there is a clear reduction of counterparty credit risk and capital requirements; when collateral is well segregated from other companies´ assets and is liquid enough to cover exposure; and when there are already risk management practices in place that control the increase of other risks;
(iii) Centralizing risk in CCPs is justified if the reduction of counterparty risk by mutualising losses of counterparties is greater than the potential systemic risk from the centralization of trading and if the reduction of operational risk, market risk, legal risk, capital requirements, costs and time invested in management practices are greater than the potential benefits obtained in bilateral agreements outside of a CCP.

Palabras clave: OTC market.

Table of content

Agradecimientos (archivo pdf, 49 kb)

Índices (archivo pdf, 158 kb)

Capítulo 1. Over-the-Counter derivative markets (archivo pdf, 383 kb)

Capítulo 2. Alternatives to mitigate counterparty risk management (archivo pdf, 556 kb)

Capítulo 3. Conclusion (archivo pdf, 65 kb)

Referencias (archivo pdf, 84 kb)

Anexo A. Figure section (archivo pdf, 199 kb)

Anexo B. Table section (archivo pdf, 262 kb)

Anexo C. Operational trading process in OTC markets (archivo pdf, 22 kb)

Anexo D. OTC derivatives according type of underlying asset (archivo pdf, 125 kb)

Mendoza Noriega, M. T. 2012. Alternatives to protect the OTC market againist counterparty risk. Proyecto Integrador Licenciatura. Administración de Negocios Internacionales. Departamento de Administración de Negocios Internacionales, Escuela de Negocios y Economía, Universidad de las Américas Puebla. Diciembre. Derechos Reservados © 2012.