21 February 2018
Kathleen Tyson-Quah


Kathleen Tyson-Quah - Granularity Ltd

8Posts 33,978Views 8Comments
Finextra community

Post-Trade Forum

The Post Trade Forum's aim is to propagate debate and discussion between senior practitioners in Post Trade Operations in the global securities market; to bring about increased awareness and knowledge across both buy-side and sell-side financial institutions in financial products and be a focal point for firms and practitioners to air views.

Are CCPs Increasing Risks? Part III

15 April 2012  |  3912 views  |  0

I've let the ball drop on blogging for the past few weeks, but have been thinking a lot about the issues.  The Post Trade Forum debate on Are Clearing Houses Increasing Risk? will take place on Tuesday morning at the London Stock Exchange. 

I've just finished my key note presentation for the debate, and I'm afraid I come down on the side of increasing risks.  I've been studying derivatives clearing infrastructure for more than 25 years, going back to the market crash of 1987 when I was at the New York Fed.  I just can't see how imposing structured clearing and margin which fragments efficient bilateral netting arrangments and stresses global liquidity can improve the current system.  I'm particularly worried about the liquidity implications for cash management, safe assets as initial margin and default guarantee fund assets, and systemic encumbrance.  At a time when credit to the real economy is already dampened, and banks are shrinking their balance sheets to fit the new Basel III capital requirements, the transition to CCP clearing could contract credit and liquidity, and prove highly deflationary.

My concerns about CCP clearing increased dramatically after talking to some Buy Side end users at last month's Risk Annual Summit.  My fellow panelists from corporations and asset managers were quite refreshing in admitting that they lack the expertise, systems, legal resource and operations capability to make the transition to daily, multi-currency CCP margining with multiple CCPs fragementing the market by product and region.  The same may be true of many banks, but they are much more reluctant to admit it openly as any admission of weakness would draw an expensive supervisor-mandated audit of systems and processes.

The Buy Side also worried that the residual bilateral portfolios with their bank counterparties would be hit with much higher Credit Valuation Adjustments (CVAs) under the new Basel III rules that become effective January 2013.  Even if they gain their objective of an opt out of CCP clearing, they will be penalised with even higher initial margin requirements under IOSCO proposals that bilateral clearing should be punitive. 

At a time when most governments are trying to jolly their banks into lending more to the real economy, Manmohan Singh of the IMF projected that the move to mandatory OTC clearing could be equivalent to a $2 trillion dollar margin call on 2nd tier banks, corporations and asset managers.   That would have a huge deflationary effect on credit and liquidity, and stall any recovery or deepen any recession.

So that's what I'm worrying about, but I'll provide much more detail on Tuesday morning.  I'll post the slides after the event.

TagsTrade executionRisk & regulation

Comments: (0)

Comment on this story (membership required)

Latest posts from Kathleen

The ESMA OTC Derivatives End User Carve Out

30 June 2012  |  4242 views  |  0 comments | recomends Recommends 1 TagsTrade executionGroupPost-Trade Forum

Hurtling Towards Harmonisation

19 June 2012  |  4452 views  |  0 comments | recomends Recommends 0 TagsTrade executionGroupPost-Trade Forum

Repo and OTC Derivatives as Financial Crisis Accelerators

16 May 2012  |  4853 views  |  1 comments | recomends Recommends 0 TagsTrade executionGroupPost-Trade Forum

Initial Margin: Theory and Practice

14 May 2012  |  4847 views  |  0 comments | recomends Recommends 1 TagsTrade executionGroupPost-Trade Forum

Are CCPs Increasing Risks? Part IV - With Slides!

13 May 2012  |  4310 views  |  0 comments | recomends Recommends 0 TagsTrade executionRisk & regulationGroupPost-Trade Forum

Kathleen's profile

job title Chief Executive
location London
member since 2012
Summary profile See full profile »
Strategy and design of financial markets infrastructure for trading, clearing, payments, settlements and margin.

Kathleen's expertise

Member since 2002
8 posts8 comments
What Kathleen reads
Kathleen writes about
Trade executionRisk & regulation
Kathleen's blog archive
2012 (8)

Who's commenting on Kathleen's posts