One of the most significant post-crisis reforms in the derivatives market has been the move to central clearing for swaps. The major clearing houses globally include LCH swap clear, CME, and Eurex, which handle the bulk of the centrally cleared swap market. The diagram on screen illustrates how swap clearing works initially party A and party B agree on a bilateral trade, but instead of the risk remaining between the two parties, the trade is passed through a clearing house. Once the clearing clearinghouse steps in, it becomes the counterparty to both sides of the trade. A faces the clearinghouse instead of facing B, and now B also faces the clearinghouse instead of facing A, this setup removes direct counterparty risk between the two parties, ensuring that A and B no longer have to worry about the others' credit worthiness. Instead, both parties rely on the clearinghouse, which manages this risk through margining, both initial and variation margins, and by sharing the risk among all clearing participants. Once a trade is cleared and reported, it becomes a part of the clearing house's portfolio, which continuously nets and offsets positions to minimize the overall risk exposure. While central clearing has helped mitigate bilateral counterparty risk, it has introduced concentration risk. Since so many trades are processed through a few major clearing houses, there's an increasing amount of exposure concentrated within these entities. For example, if all of a bank swap positions are cleared with LCH swap clear, it's effectively ties a significant amount of its risk management to just one clearing entity. This concentration poses systemic risk as clearing houses themselves are not infallible. Should a major clearing house experience difficulties, this could disrupt the entire market. On the other hand, splitting trades across multiple clearing houses can create collateral inefficiencies. When trades are spread across clearing houses, parties can't net positions leading to higher collateral requirements. This is one reason why there have been price differences in wholesale market swaps going through different clearing houses. These differences indicate a market desire to avoid over concentration, even at the cost of higher collateral requirements. In summary, while central clearing has undoubtedly enhanced transparency and reduced bilateral risk, it has introduced new challenges related to concentration and collateral inefficiency. The use of major clearing houses like L-C-H-C-M-E and UEX continues to be a balancing act between mitigating systemic risk and managing collateral efficiently.