Posts this month
A blog on financial markets and their regulation
Last month, LCH published a White Paper entitled CCP Conundrums which raise a number of interesting issues, though I think that “conundrums” is a bit of a euphemism in this context. In my view, Central Counter Parties (CCPs) or Clearing Corporations globally face serious vulnerabilities arising out of a confluence of factors:
There is no regulatorily imposed minimum margin that could prevent such a race to the bottom. In fact, there is a tendency for banking regulators to turn a blind eye to this risk because they have no desire to shore up the CCPs by draining liquidity and capital from the banks.
Ultra loose monetary policy in the developed world is leading to yield chasing and suppression of risk aversion. This may be the intended “portfolio balance channel” of monetary policy transmission, but it creates an environment where risks are probably being ignored.
This is what LCH refers to as the risk of pro-cyclicality of risk management at the CCPs. LCH is more or less openly saying that margins need to be increased before monetary conditions tighten as it would be too late to do so after tightening has already happened.
For all these reasons, I have been worrying for quite some time now that in the coming years, the failure of a large global CCP is more a matter of when rather than whether.