What happens when a Clearing House goes bust?

Today the chances that a Clearing House will default in the future have never been more likely. Political pressure and regulatory resolve is creating a risk concentrator within the clearing houses so that it’s not if a Clearing House goes bust but when.

The introduction of OTC derivatives into clearing will be the trigger to a thermal time bomb in the industries market systems which will see overheating to such an extent that it will bring down many financial institutions. The inability of the industry to have a working, robust and efficient interoperability link between all clearing houses will really impact when a clearing house begins to falter.

The folly of nationalistic protection of clearing houses which has caused a fragmented market structure will hinder the ability of the industry to manage a default. When this default happens, time and speed to react will be of the essence. But will regulators and the clearing house community along with European treasuries, let alone financial services firms, be able to kick into action and respond effectively to limit the fall out from a default?

Financial services firms for years have been introducing and updating disaster recovery and business continuity plans. They test these regularly and in most cases we can be confident that they would be able to react to a normal disaster and default. However, a clearing house falling down is another story. This type of disaster would entail a capability to manage a default encompassing many firms and various structure organisations needed to maintain stability.

All this and more will be discussed with leading industry experts on the morning of the 17th April at the Post Trade Forum debate on Post Trade Operational Risk: Are Clearing Houses increasing risks?