Clearing Houses are becoming even more important in the markets as regulatory and political change forces OTC into their systems and onto their balance sheets. Who knows if the balance sheets of Clearing Houses will be able to cope? We hope and expect that
the regulators and the Treasury will make sure there is enough capital in place or at least available to mitigate this fear and risk. However should a Clearing House come down what mechanism is in place to determine who the beneficial owner of the asset is?
There has never been a CCP default and there are no precedents to follow to protect the beneficial owner unless they are being written. But are they? I haven’t found anyone in the industry to answer my question of beneficial ownership protection. We have
certainly seen problems and delay with banks defaulting but a CCP default will be so much more cataclysmic in the market and could most certainly be contagious to markets and their participants. Even other CCPs could be badly affected and this calamity would
keep squaring the risks creating a similar effect to a nuclear reactor overheating.
CCPs must have total and unequivocal protection if they are to fulfil their role and the needs of the market. Surely before OTC entry into Clearing Houses there has to be a transparent record of the financial condition of each Clearing House and a complete
picture of how each CCP will operate to manage a default. This has to include how the beneficial owner can be assured that their assets are totally protected and that there will be no delay in them accessing their holding.
This might entail Clearing Houses and CCPs coming together to produce a standardised procedure in the case of a default. Or is this already included in the interoperability that we all hear about between some, but not all CCPs?
All this and more will be debated at the next
Post Trade Forum debate on the 17th April at the London Stock Exchange