With the amount of
collateral held by central counterparties (CCPs) expected to rise to as much as
to US$2 trillion as over-the-counter (OTC) derivatives move onto CCP platforms, market
participants must understand their role more deeply, a new report suggests.
report by research firm Finadium looks in detail at the CCPs, which have
emerged as critical players in the financial markets after regulators made it
clear that OTC derivatives should move from the bilateral world to central
CCPs are a
heterogeneous group of organisations worldwide with diverse ownership and do
not conform well to the desires of regulators seeking to impose one framework
for operations and risk management, according to Finadium. Currently CCPs
control at least USD 400 billion in collateral assets as per data collected
from annual reports of CCPs recently.
The Finadium report, which
serves as a benchmark guide for understanding CCP rules and roles, says CCPS
are currently working to harmonise the demands of regulators that are
emphasising the safety of CCPs with the realities of managing risk across a
variety of product types and a diversity of users.
bilateral clearing which is predominantly manual, CCPs are highly automated and
can manage vastly more collateral substitutions. They also have the ability to
conduct intraday collateral calls on a frequent basis. Regulators see the
processing strength of CCPs as an important cornerstone for operational risk
management, hence heir desire for all standardised OTC derivatives to be
cleared on CCPs in the coming years.
The CCP landscape
will evolve based on strategies around three main areas: OTC derivatives moving
to the futures market; consolidation in the CCP industry; and clarity over which
products are appropriate for CCP clearing. Several CCPs have expressed
their preference that OTC derivatives should ultimately be part of the futures
market to reduce margin obligations and protect clients from additional
regulatory requirements, particularly under US Dodd-Frank Act. The report
also says CCPs are not ready for cross-border margining or even cross-product
margining until regulators sort out global bankruptcy laws. However, CCPs are
not against consolidation of ownership, which will allow a reduction of
investment in technology and headcount and prove cost-effective for end-users.
Another new report
by Berenberg Bank says that European CCPs could experience a capital shortfall
of EUR 750 million after the implementation of European market infrastructure
regulation on clearing house capital requirements. The largest driver of the
capital shortfall is the requirement that CCPs hold capital linked to the size
of their cost bases. Given clearing it is largely a fixed cost business, the
capital raise is largely a one-off, and capital levels need not scale with any
potential growth in clearing activity. The report says that the impact of the
regulation on CCPs could vary. It identifies LCH.Clearnet as that one that
could be highly affected and ICE Clear Europe and Eurex as modestly affected by
the capital shortfall.