Derivatives clearing and settlement: A comparison of central counterparties and alternative structures

The past several decades have seen fundamental transformations in the size, structure, and liquidity of world financial markets. Equity markets have fluctuated in value (currently about $17 trillion for U.S. equities) and have introduced new products such as exchangetraded funds (mutual funds that trade like equities). Increasingly, structured equity products combine derivatives and cash market positions to manage equity risks. Debt markets have grown rapidly (currently about $26 trillion for the U.S.1), with the greatest growth coming from mortgage- and asset-backed securitizations. Recently, credit derivatives (currently $26 trillion in notional value2) have begun to supplement and even, in some instances, replace cash markets in debt. Derivatives markets, of which over-the-counter (OTC) interest rate swaps are by far the largest component, have grown to $284 trillion in notional value.3