Interest Rate Swaps: Cleared and Customized

As policymakers in emerging and frontier markets consider the regulatory framework for financial markets in their jurisdictions, the need for customized risk management tools by market participants remains important.

Market participants use over-the-counter (OTC) derivatives because they are able to customize the terms of their contracts to align more precisely with their specific hedging needs. 

With the expansion of central clearing for OTC derivatives, there is a perception that cleared IRD transactions have become standardized, like interest rate futures.

Using data from the Depository Trust & Clearing Corporation, this paper examines the population of cleared fixed-for-floating IRS and demonstrates that cleared products remain highly customizable as compared to futures contracts, enabling buyers and sellers to agree on bespoke terms to better manage the risks to which they are exposed in the normal course of their business operations.

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