Bulletin – March Quarter 2014 Descriptions for Figures March Quarter 2014 Bulletin article: Non-dealer Clearing of Over-the-counter Derivatives

Figure 1: Structure of Client Clearing Relationships

This figure compares the relationship between a non-dealer, dealer, clearing agent and central counterparty for a bilateral trade and trade that is cleared through a client clearing arrangement. For a bilaterally cleared trade, the non-dealer has a direct relationship with the dealer. For a trade cleared through a client clearing arrangement, the relationship between the dealer and non-dealer is replaced with three separate relationships. The non-dealer has a direct relationship with its clearing agent, and the clearing agent and dealer have a direct relationship with the central counterparty. In addition, if the clearing agent were to default, the non-dealer would have a direct relationship with the central counterparty.

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Figure B1: The Mechanics of Collateral Transformation

This figures shows the mechanics of collateral transformation. The first step in a collateral transformation transaction involves a non-dealer providing lower-quality assets to its clearing agent. In the second step, the clearing agent will transform the lower-quality asset into a higher-quality through the repo or securities lending markets, or by using its own proprietary inventory of securities. In the last step, the clearing agent will provide the high-quality asset to the central counterparty.

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