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Clearing houses are becoming more systemically important following rule changes that will mean all over-the-counter derivative trades will have to be cleared centrally.
John Wilson, global head of OTC clearing at Newedge, told Financial News that competition among clearing houses on how much collateral they collect, which is posted as a guarantee to trades, could further amplify risk: “If a major clearing member defaults, it is inevitable that many clearing houses will be simultaneously affected. International regulators need to plan for such a scenario.” He added: “Clearing houses know that end clients care about how much collateral they post against their derivatives trades and will inevitably compete on these fundamental risk management issues.”
Earlier this month, Larry Fink, chairman and chief executive of BlackRock, remarked on the anniversary of the collapse of Lehman Brothers: “…I truly believe the risks that we’ll face in the future will be different from those we’ve seen, and two risks really stand out in my mind. The first stems from the move to impose clearing on additional financial instruments, which has had the effect of taking money off of opaque balance sheets and putting it into centralised clearing houses and exchanges. The upshot is that regulators really need to undertake a thorough review of how these systems operate and ensure they are up to the job.”
In a submission to IOSCO’s first consultation on recovery and resolution a year ago, BlackRock said that a CCP failure had the potential to be a “catastrophe”.
Christian Lee, head of the clearing practice at consultancy Catalyst, said: “There is no doubt that clearing houses are now too big to fail. The key issue for policymakers is to avoid moral hazard: governments and central banks do not want to be on the hook in the event of a failure.” Clearing houses across the globe are also drawing up their own contingency plans.
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