ISDA cautions on open access for CCPs

The risks of giving central counterparties (CCPs) open access to derivatives trading venues must be properly managed to ensure the safety of financial markets infrastructures, the International Swaps and Derivatives Association (ISDA) has warned.

The derivatives trade association's comments came as part of its response to the joint consultative report released in March by the Committee on Payment and Settlement Systems (CPSS) and the technical committee of the International Organization of Securities Commissions (IOSCO) on principles for financial market infrastructures.

“While we applaud the open access access must go hand in hand with appropriate controls, which can only be achieved once financial market infrastructures make appropriate risk management and technology investments,” read the ISDA response.

Open access to financial market infrastructure would allow multiple CCPs to offer clearing services for a derivatives trading venue. By consolidating flows with one clearer, market participants can reduce the amount of collateral they need to hold with their CCP through margin offset capabilities.

ISDA stressed that if capital requirements for clearing members are lowered through open access, central counterparties should have real-time risk management tools to monitor capital calls – such as daily pre-funding of client margin and intra-day margin requirements – particularly under extreme market conditions.

The issue of giving CCPs access to trading venues is currently being debated by the European Parliament and Council of the European Union as part of the European markets infrastructure regulation. The legislation will establish some of the new rules governing over-the-counter (OTC) derivatives trading in Europe.

The trade body also urged CPSS and IOSCO to establish principles for handling the default of central counterparties, viewing this as “vital for financial stability”.

“Clearing members should not be legally obligated to make the CCP whole by any means and should be allowed some degree of flexibility, together with the CCP, to work out the precise loss-sharing rule and/or CCP re-capitalisation mechanism required,” read the ISDA response.

After CPSS and IOSCO have gone through the feedback to its consultative paper, they plan to publish a final report in early 2012, which will be designed to help regulators as they finalise new rules for OTC derivatives trading.