Substantial sums still to be backed

The amount of money tied up in clearing houses can be breathtaking. The Depository Trust & Clearing Corporation, which clears all equities trades on exchanges in the US, settled $1.48 quadrillion (million billion) in securities transactions last year, meaning it turned over the equivalent of US annual gross domestic product every three days.

On a more modest scale, the value of trades handled by members of the London-based LCH.Clearnet as logged on its 2010 books amounted to €480bn, still equivalent to a year's worth of economic output by Switzerland. The amount of collateral tied up at the clearing house run by CME Group, which also operates the Chicago Mercantile Exchange, was $100bn as of March.

In addition to charging fees, clearing houses make money by investing their funds in interest-bearing financial instruments such as overnight money markets.

For some economists, the sums passing through clearing houses will swell considerably because over-the-counter derivatives markets are currently undercollateralised. A March report for the International Monetary Fund estimated that the overall OTC derivatives market was short of $2,000bn in collateral. Assuming about two-thirds of the OTC market moves to being cleared, clearing houses would require about $1,400bn in extra margin cover.

The heightened concern stems from the very reforms that sprang out of the 2008 crisis and the size of the OTC derivatives markets they address. The notional value of OTC derivatives trades outstanding is about $600,000bn, according to the Basel-based Bank for International Settlements – seven times larger than exchange-traded futures markets. Of that, estimates of how much will shift on to CCPs vary from 60-80 per cent, depending on the extent to which contracts are deemed “standardised” and thus eligible for clearing.

Work is under way among global standard-setters to try to ensure that functions such as risk management policies and those that set levels of margin are robust to tackle new risks, and as far as possible standardised across CCPs globally.

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