According to Edwin Schooling Latter, head of payments and infrastructure at the Bank of England, CCPs should provide complete transparency over the modelling of their margin requirements and how they cross-margin between different product lines.
A large number of CCPs globally are aiming to take advantage of regulatory mandates that will require standardised over-the-counter derivatives to be cleared at a clearing house, with many operating as commercial enterprises. In Asia, there are already seven CCPs, with at least one further jurisdiction also planning to set one up.
Schooling Latter said that as public authorities were endowing CCPs with the responsibility to bring safety to the derivatives market, transparency was of paramount importance. Schooling Latter rejected the two main reasons he'd been given by CCPs for pushing back on disclosure. "I have heard CCPs say, 'our margin model is proprietary' or that 'the model can be gamed by the industry'. In the first case, it's not acceptable for a private company managing a CCP to say 'we won't tell you how we manage risk'. And if the margin model is weak then change it." Instead, there is a risk of CCPs competing on margin to generate business, which will negatively impact their risk management, Schooling Latter said.
The International Organisation of Securities Commissions has outlined minimum standards for market infrastructure, with a key principle specifying that all CCPs should calculate margin at a 99 per cent confidence interval, but Schooling Latter warned this gives CCPs too much discretion.
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