Global banking regulations change the way in which certain markets operate. In the USA, for example, the Dodd$-$Frank

Wall Street Reform and Consumer Protection Act $(2010)$ introduced a requirement for swaps to be cleared through either a

derivatives exchange or a clearing house. Formerly, swaps were traded solely over$-$the$-$counter $($OTC$),$ but regulations such as

Dodd$-$Frank along with capital requirements for OTC derivatives have led to important changes in the marketplace. Some trades

that were OTC before can only be undertaken through a clearing house. Other trades that can still be undertaken OTC have

become costlier as banks need to adhere to larger capital reserve requirements and leverage ratios introduced as part of the Basel

accords.

One of the world's premier providers of clearing house services is LCH Group. The British operation, which began its

life as the London Clearing House in $1888,$ acts as the counterparty to trades in various markets. Like any clearing house, LCH is

the intermediary between two parties and assumes the counterparty risk. Clearing houses protect themselves by requiring margin

to be posted against all trades. It is easy to see why regulators feel more comfortable with trades cleared through a clearing house

rather than undertaken OTC. Not only is there more transparency regarding the trades themselves, but there is a reduction of

counterparty risk, which can cause instability during a crisis, particularly when doubts surface as to the solvency of

counterparties.

LCH has gradually widened its operations to clear products that previously traded solely OTC. In $2012,$ LCH launched

ForexClear to clear foreign exchange derivatives, especially a contract called non $$ deliverable forwards $($NDFs$).$ NDFs are

essentially forward contracts for difference $($forward CFDs$).$ With a NDF$,$ two parties enter a foreign exchange contract with a

face value calculated at the NDF $($agreed$)$ rate. Later, if the exchange rate has changed, the difference of some notional amount

calculated at the prevailing spot rate is paid by one party to the other. The volume of NDF trades passing through ForexClear has

grown significantly as margin and capital requirements on uncleared trades increased. Where NDFs were once traded solely

OTC, the majority of trades are now cleared. Government regulations, laws and banking reforms have led to real changes in the

marketplace, including new platforms, products and services $($LCH Group, $2018).$

In the Australian economy, regulatory checks over the OTC derivatives market were strengthened after the outbreak of

the GFC in $2008$ and the focus was on interconnectedness of financial systems. The regulatory efforts directed financial markets

towards a central counterparty $($CCP$)$ clearing house mechanism, which acts as a seller to every buyer, and buyer to every seller.

The central counterparty is a financial institution that assumes credit risk between parties to a transaction and offers clearing and

settlement services. This arrangement mitigates bilateral counterparty risk and limits all bilateral exposures to a single

multilateral exposure with the CCP $($Cox$,$ Garvin & Kelly, $2013).$ The report submitted by a working group on the global

financial system in July $2018$ has indicated that the arrangement has reduced counterparty risk, especially between insurance

companies and private pension funds $($ICPFs$)$ and the rest of the financial sector in Australia $($Boyd$,2018).$

Why would banking regulators view cleared trades more 'leniently' than OTC trades?

Please explain in detail and give data $($or sources$)$ to prove the informations.