Never say no when a client asks for something, even if it is the moon. You can always try, and anyhow there is plenty of time afterwards to explain that it was not possible.
Richard Nixon (1913–1994)
This chapter describes the clearing for institutions that are not members of a CCP. Such entities need to clear as clients (customers) of a general clearing member or GCM (known as a futures commission merchant or FCM in the US). Such clients may be traditional clients of banks, but may also be other banks and financial institutions that cannot, or find it inefficient to, become CCP members. This raises a number of issues in relation to the interaction between the client and their clearing member such as the impact of defaults and the treatment of margin passed between them.
A non-CCP member (referred to as ‘client’) wishing to clear an OTC contract must do so through a counterparty that is a GCM (referred to as ‘clearing member’) of the CCP in question. The general client-clearing setup is illustrated in Figure 11.1 where the relationship between clients and clearing members is essentially bilateral and the CCP does not bear the risk of the client. Note that clients can have a clearing relationship with more than one clearing member as shown.