The uptake of insurance by clearing houses will come down to cost and robustness, says Marcus Zickwolff, head of trading and clearing at Eurex Group.
The focus on clearing houses’ ability to withstand a failure has increased following reforms requiring liquid OTC derivatives trades to be cleared through a central counterparty (CCP). The move has raised concerns market risk has now been moved from banks to CCPs.
Zickwolff, who is also the chairman of the European Association of CCP Clearing Houses, said that CCP insurance could be one of the tools in a recovery or resolution plan. In the case of clearing member default, CCPs need immediate liquidity, Zickwolff said. “It’s hard to imagine that an insurance company would be immediately and unconditionally able to provide sufficient funding."
He said most CCPs, such as Deutsche Börse-owned Eurex Clearing, have the backing of a mother company that could step in if all lines of defence failed. “Of course, a CCP may find it more attractive to rely on an insurance service – it really depends on the economics and robustness of the insurance offer.”
If a member was to go bust, CCPs would first use the margin posted by that counterparty, then use some of its own equity, before diving in to members’ default fund contributions. Under the proposed insurance solution, when all default funds were exhausted, the GSCA and its group of insurers would then step in.
The Committee on Payment and Settlement Systems and the International Organization of Securities Commission released 24 principles for systematically important market infrastructures, including CCPs, in 2012, addressing clearing houses increased importance in the market and the need for default procedures.
The Bank of England, which assumed responsibility for regulating local CCPs and securities settlement systems in April 2013, has also been closely monitoring clearing houses. Last week, the central bank released an update report that found all UK CCPs have now introduced arrangements to manage clearing member default losses that exceed their pre-funded resources.
“There is some pressure on central banks to step in and prevent a crisis", said Virginie O’Shea, senior analyst at Aite. “And questions remain on whether the insurance route is going to be robust enough. Insurers are not exposed to the derivatives market, so there is one degree of assurance.”
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