require clearing of “all standardized OTC derivatives through regulated central counterparties,” [it] marks a sweeping change to the way OTC derivatives are handled, implying a shift away from the dealers at banks who brokered such contracts to the formal exchanges that have long jealously eyed the huge OTC markets.
That is false. A CCP is not an exchange. A CCP is somewhere that trades get moved to after they’ve been executed.
First the trades are executed directly between the parties, then they get moved to a CCP. So, under Geithner’s plan, trades cleared on a CCP would still be entered into between buy-side clients and OTC dealers. This means that the dealers are not losing business to exchanges, at least not under this part of Geithner’s plan. In fact, the market has already started moving dealer-to-dealer trades onto CCPs in anticipation of this kind of regulation.
Originally published at Derivative Dribble and reproduced here with the author’s permission.