This month, the Clearing House Association put out a paper with nine new recommendations about an emerging plan for the central clearing of derivatives. It was in April that the International Organization of Securities Commissions and the Bank for International Settlement’s Committee on Payment and Settlement Systems issued final standards geared toward making clearing, payment, and settlement systems more able to withstand financial defaults and shocks.
The Clearing House Association is warning about what it perceives as unrealistic and poorly defined expectations for Clearing Members and how this might end up creating additional problems. This issue involves indicators that there is friction between experts, international regulators, and standard-setters on how to utilize central counterparties to ease financial contracts’ traffic through global markets. The bank-owned association said that although it considered the CPSS-IOSCO standards a key beginning in tackling the issues associated with financial market infrastructures, under the new standards, we may be left with the problem of clearing member firms that provide important support to central counterparties ending up with too much of the burden. The Clearing House Association wants to make sure that liability for clearing members is ascertainable and limited. It is calling on central counterparties to make sure that the proper governance structures and liquidity demands and liquidity management protocols on clearing members are assessed in the wake of conflicting, new demands, such as:
• Liability for clearing members that is manageable, limited, and can be ascertained.
• Proper “skin in the game” for central counterparties.
• Margin requirements to protect clearing members that aren’t defaulting from those that are.
• Realistic expectations for clearing members when liquidity demands are made by central counterparties.
• Coordinating liquidity demands placed on clearing members to prevent them from getting overwhelmed with intraday margin calls.
• Restrictions on the how and when central counterparties can modify practice standards or rules during a crisis.
• Greater transparency on central counterparties so that clearing Members can monitor risk.
• The ability to isolate loss liabilities within central counterparties so that contagion doesn’t occur.
The Clearing House Association says that the recommendations are intended to offer general principals as new rules are made known.
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