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JP Morgan analysts, led by Kian Abouhossein, produced research last month that suggested that the widespread adoption of clearing in the OTC markets could result in a shift of systemic risk from banks to clearing houses, overburdening the providers and making them susceptible to tail-risk events, particularly in the sovereign markets. The note read: “Bank regulation is likely to transfer banking risk to highly leveraged and potentially under-resourced clearing houses, which may not be able to sustain a correlated tail-risk scenario, in our view”.
The note represents a challenge to the post-crisis reform agenda, which involves pushing standardised OTC derivatives through clearers, which reduce risk by sitting between a trade to guarantee payment in the event that either party defaults
Analysts say clearers are particularly sensitive to sovereign risk events because they: accept government debt as a form of collateral; reinvest their own cash into government-backed securities; and, perhaps most crucially, they are key counterparties in the repo markets.
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