| 1. EXECUTIVE SUMMARY | 1 |
| 2. INTRODUCTION | 6 |
| 3. STRUCTURE OF CLEARING ARRANGEMENTS | 11 |
| 3.1 Role of the clearing house | 11 |
| 3.2 Clearing members and their clients | 12 |
| 3.3 Money settlement procedures: the role of settlement banks | 12 |
| 4. SOURCES AND TYPES OF RISK TO AN EXCHANGE CLEARING HOUSE | 16 |
| 4.1 Overview | 16 |
| 4.2 Defaults by clearing members | 16 |
| 4.3 Settlement bank failures | 17 |
| 4.4 Investment of clearing house funds | 18 |
| 4.5 Operational risks | 18 |
| 4.6 Legal risks | 19 |
| 5. APPROACHES TO RISK MANAGEMENT | 19 |
| 5.1 Overview | 19 |
| 5.2 Risks of potential defaults by clearing members | 20 |
| 5.3 Risks of settlement bank failures | 27 |
| 5.4 Investment risks | 28 |
| 5.5 Operational risks | 28 |
| 6. POTENTIAL WEAKNESSES IN CLEARING ARRANGEMENTS | 29 |
| 7. WAYS TO STRENGTHEN CLEARING ARRANGEMENTS | 33 |
| 8. CROSS-BORDER ISSUES | 38 |
| 8.1 Contracts and collateral denominated in foreign currencies | 38 |
| 8.2 Foreign participants | 39 |
| 8.3 Collateral held in foreign jurisdictions | 40 |
| | 8.4 Links with foreign clearing houses | 40 |
| | Annex 1: Glossary | 43 |
| | Annex 2: Key features of selected clearing houses in the G-10 countries | 47 |
| | Annex 3: Money settlement arrangements of clearing organisations | 115 |
| Annex 4: Arrangements for protecting client positions and assets | 133 |
| Annex 5: Mechanics of margining systems for futures and options | 135 |
| Annex 6: Bibliography | 137 |
