Post-financial crisis, regulators have been steadfast in their insistence that more of the derivatives market be passed through risk managers known as clearing houses. But many market participants worry about the implications of a failure of one these institutions.
Investors and banks in the US have already begun to comply with a G20 mandate from 2009 to clear their derivatives trades through central counterparty clearing houses (CCPs). The EU and Japan are set to follow suit in the coming year. Policy makers expect the move will bolster financial markets.
This issue has generated intense and inconclusive debate between regulators, banks and some of the world’s largest asset managers. “All this debate is around what happens if the money is not sufficient,” says Damian Carolan, partner at Allen & Overy in London. Regulators have repeatedly stressed there will be no public bailout for clearers. This means, regulators will either have to develop frameworks to keep a failing clearing house going, or they will have to close it. To that end, the Bank for International Settlements and the IOSCO have called for the drafting of a recovery plan. In a report published last month the regulators said CCPs should be given the tools to “continue to provide critical services as expected, even in times of extreme stress”.
Market participants have expressed fears that CCPs’ powers are too wide-ranging. In September, JPMorgan cautioned that CCPs could potentially call on members to stump up additional billions in a crisis – creating unquantified liabilities for banks such as itself. JPMorgan is a member of 70 CCPs. JPMorgan wants clearing houses to have larger financial buffers to cover a greater range of potential disasters. In part that would require CCPs to increase their direct contributions to the guarantee fund or have more “skin in the game”. Advocates say it would incentivise the operators to pay closer attention to risk management.
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