Why Are Highly Customized OTC Derivatives Still Not Centrally Cleared?
Highly customized derivatives are difficult to centrally clear because their unique, non-standard terms (e.g. specific underlying assets, non-standard dates) make it impossible for a CCP to find offsetting trades or create a standardized risk model. The lack of fungibility prevents the CCP from effectively mutualizing the risk.
Customization inherently resists standardization.
Glossar
Customized Derivatives
Construction ⎊ Customized derivatives, within cryptocurrency and broader financial markets, represent agreements tailored to specific risk exposures and payoff profiles not readily available through standardized exchange-traded contracts.
Customized OTC Derivatives
Structure ⎊ Customized OTC derivatives represent privately negotiated financial contracts referencing cryptocurrency assets, differing from standardized exchange-traded instruments through bespoke terms and counterparty risk management.
Customized OTC Contracts
Contract ⎊ Customized over-the-counter (OTC) contracts within cryptocurrency, options trading, and financial derivatives represent bespoke agreements negotiated directly between two parties, bypassing standardized exchange platforms.
Lack of Fungibility
Differentiation ⎊ Lack of fungibility within cryptocurrency, options, and derivatives stems from inherent distinctions between nominally identical assets, impacting market efficiency and pricing mechanisms.