July 5, 2017 / 4:41 PM / 2 years ago

CCP study raises concentration concerns

LONDON, July 5 (IFR) - Revised guidelines for the resilience, recovery and resolution of central counterparty clearinghouses were issued today by a group of regulatory committees as part of an effort to plug gaps in rules aimed at avoiding taxpayer bailouts of the systemically important firms.

The Financial Stability Board, the Committee on Payments and Market Infrastructures, the International Organization of Securities Commissioners and the Basel Committee on Banking Supervision, also raised new concerns around the interdependency of CCPs, which have become crucial financial infrastructures as a result of post-crisis reforms that forced much of the US$483trn over-the-counter derivatives market into central clearing.

In a study of 26 CCPs across 15 jurisdictions, the committees found that many clearinghouses maintain relationships with the same financial entities.

Concentration is high with 88% of financial resources, including initial margin and default funds, sitting in just 10 CCPs. Of the 307 clearing members included in the analysis, the largest 20 accounted for 75% of financial resources provided to CCPs.

More than 80% of the CCPs surveyed were exposed to at least 10 global systemically important financial institutions, the study showed.

In an analysis of the contagion effect of clearing member defaults, the study found that more than half of surveyed CCPs would suffer a default of at least two clearing members as a result of two clearing member defaults at another CCP.

“This suggests a high degree of interconnectedness among the central clearing system’s largest and most significant clearing members,” the committees said in their analysis.

Additional CCP data will be collected through the year to quantify changes in central clearing interdependencies.

The committee chairs also agreed to convene a Derivatives Assessment Team to assess incentives to central clearing arising from the interaction of post-crisis reforms, such as uncleared margin requirements. A report will be completed by the end of 2018.


Revised guidelines on CCP resilience from CPMI and IOSCO clarify the role of the board of directors at a CCP. They note that responsibility for establishing a risk management framework and day-to-day risk management tasks lies with company management, with the board providing an evaluation and monitoring role.

Clarity is also provided around the period of risk for stress testing purposes, with alternative techniques for analysing stress testing scenarios, models and underlying parameters and assumptions. A final framework for standard CCP stress tests will be completed in the next 12 months.

While some CCPs will be required to make changes to rulebooks, governance or regulatory frameworks, CPMI and IOSCO said that the latest guidelines do not impose additional standards beyond those already included in the 2012 principles for financial market infrastructures.

“CCPs should promptly identify any areas where changes are necessary and address them as expeditiously as practicable, so that implementation of the necessary changes is completed no later than the end of 2017.”

Revised guidance for recovery and recovery planning, also issued by CPMI and IOSCO, clarifies the treatment non-default losses such as those stemming from operational failure or cyber attack. CCPs will be required to have sufficient liquid net assets funded by equity to implement plans for covering those losses. Additionally they must have a viable plan to raise new equity capital in the event of a shortfall.

“Losses relating to general business risk are properly the responsibility of the owners of the [financial market infrastructures],” CPMI and IOSCO said in the guidance.

Additional loss-absorbing arrangements, such as third-party insurance or indemnity agreements, should also be considered, though the guidance warns that indemnity providers could experience solvency and liquidity strains in a severe stress scenario.

At the same time, the FSB provided new CCP resolution guidance, providing further clarification on loss allocation procedures and the steps authorities should take to establish crisis management groups for relevant CCPs. (Reporting by Helen Bartholomew)

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