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As it stands, the Basel Committee on Banking Supervision has set out capital treatment for client clearing, but there is less clarity on indirect clearing. As a result, few banks are willing to offer the service.
"Indirect clearing and the concerns of banks have probably to be addressed by banking regulation. But definitely, I agree this is an area where it would be good to provide clarification on both the risks to be addressed and the implications for capital charges with a view to creating the right incentives", says Russo.
A source at the Basel Committee acknowledges its interim rules do not specifically address indirect clearing. However, he says it could be argued that the client of a direct client could obtain the same preferential treatment, so long as segregation and portability requirements are met – but meeting these requirements becomes "more difficult in practice if the chain of clients is extended".
If indirect clearing is ever to work in practice, Mark White, head of capital management and optimisation at Bank of Montreal and a former head of the Basel Committee's risk management group, thinks the issue of portability must first be addressed. "I think it's important that regulators of CCPs, banks dealing with CCPs and, most importantly, CCPs and their members, take it upon themselves to make portability for indirect clearing a reality. In the current market, it would not be hard to find other clearing members to take on new business, so the true test of this will be in the next crisis and the next systemic stress", he says.
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