All Clear: Clearing Houses Reduce Systematic Risk

Clearing houses play an important role in the global financial sector but in order to understand a clearing house’s role in the global financial sector it’s important to start with the basics. Clearing houses are essential to manage and reduce systemic risk in the Derivatives market.

What is a Derivative?

A derivative is a contract between two parties and the value is determined on the fluctuations in the value of the asset – the underlier. Examples of underliers could be Interest rate derivatives, stocks, currencies or goods while the most common type of derivative contracts are forwards, futures and Interest rate swap claims.

The benefit of a derivatives contract is that they help improve the risks involved in transactions. The interest rate derivatives market is responsible for the vast majority of the other-the-counter market.

Counterparty Systematic Risks

Even when a derivative is performed correctly, the contract leaves its two counter-parties at risk for a potential loss in two primary ways:

  • Performance of underlying asset: In some derivatives contract, when one party loses, the other one gains depending on the agreed upon asset.
  • The default of the counter-party: a systematic risk is that the counter-party on the trade will not meet its obligations of the contract by defaulting.

The amount risk can be assumed by the counter-parties depends on the structure of the Interest rate swap or trade. The derivative can be bilaterally negotiated, known as other-the-counter trades between the buyer and seller or it can exchanged through a centralized facility. The over-the-counter trades often expose the counter-parties to more risks of defaults than trades through the exchange. However, the other-the-counter trades are able to be customised to meet the specific needs of the counterparties. One way that parties decrease risk through the other-the-counter trade or exchanges is by clearing the trade through a clearing house.

The Role of the Clearing house

Clearing houses are a third party institution that acts as the middleman between the two original counter-parties. The clearing house assumes the obligations of both parties and acts as both the buyer and seller. The clearing house offers several benefits to the parties including improved risk management and improved transparency. Through its procedures the clearing house reduces the systemic risk with derivative contracts. The clearing house will assume responsibility of both parties and therefore assumes the risk.  The clearing house also simplifies the management of collateral for all members to help improve risk-management.

What Would Your Chiropractor and Your Osteopath Advise You?

Many of us have experienced pain in the bones, ligaments, soft tissue or spine without any reasonable explanation. More often than not, our general practitioners can’t diagnose us, give us painkillers and send us home with the behest to go back if things get worse. In such cases, it is the help of professionals such as a physiotherapist or chiropodist and their knowledge of alternative medicine that can relieve us from our pain and help us get fit again. The services of such practitioners can be expensive but this is a case in which it is well worth it. While these specialists have different approaches (the chiropractor is more specific and deals with bones, joints and adjustment of the spine, while the osteopath treats the body as a whole) they have something in common – the good advice they can give us in order to improve our lifestyle and help us avoid injuries.

One of the best pieces of advice you can get from your chiropractor or osteopath is to walk. It is true that nowadays the distances are often serious and life is quite hectic, but going for a walk in your free time is something that can do you a lot of good, and the specialists have come up with different ways to motivate such a healthy activity. They would advise you to take a friend along – it is always more fun when you are not alone – or to get a dog and make the walk something compulsory. If you feel like walking on your own, you could take an audio book along, thus you won’t be feeling guilty that you are walking aimlessly and would be able to get something done. There are different strategies you can put into practice – reward yourself for every mile you walk, window shop, calculate the money you have saved on transport or even think of a motivation of your own – in any case, you are sure to benefit from walking.

If people consulted their chiropractor or osteopath before starting a new sport or manual job, the number of traumas and injuries would probably be reduced to a minimum. These specialists have been studying about the musculoskeletal system in humans for 4 or 5 years and would be able to tell you how to carry out your activities in a safe manner. For example, never forget to warm up and warm down, drink a lot of water during training, don’t lift heavy items on your own and make sure you always maintain a proper posture that will keep you unhurt. If you work in an office, make sure you keep your back and neck straight and always spend a couple of minutes now and then to stretch.

Last but not least, try to get some exercise every day. This does not have to be something time-consuming or overstraining. 15-20 minutes every morning would do – stretch, move your limbs and joints, make a few squats, etc. You could also take up some sport – for example, swimming, – and your osteopath and chiropractor will be proud with you, but you don’t have to do so to stay healthy. Move a lot, walk, exercise and maintain a safe posture – these are the basic tips you need to follow to stay fit and unhurt.