Asset manager and bank heavyweights call for major reform to clearing houses

BlackRock, Goldman Sachs, Allianz, JP Morgan and Vanguard are among those raising concerns about CCPs, urging regulators to take action.

Nine major financial institutions have called on regulators to take action to make central counterparties (CCPs) safer amid concerns that clearing houses may fail when faced with severe market shocks.

BlackRock, Goldman Sachs, JP Morgan, Allianz, Citi, Societe Generale, State Street, T. Rowe Price and Vanguard published a joint paper detailing how regulators could improve the “safety and soundness” of CCPs. 

In a statement, the industry heavyweights said that CCPs have been increasingly relied upon to protect from counterparty losses during market shock events. Despite regulators taking steps to improve the situation in recent years, the banks and asset managers agreed that issues relating to resilience, recovery and resolution of CCPs need action.

“Our recommendations would help ensure that clearing members’ and end-users’ exposures to the CCP are limited, ascertainable and manageable,” said Marnie Rosenberg, global head of clearing house risk and strategy at JP Morgan.

The recommendations the organisations have put to authorities focus on the key concerns around resilience, recovery and resolution.

They include ensuring CCPs are subject to greater risk management standards, requiring CCPs to make “material contributions” of their own capital to the default waterfall, introducing a clearing ballot to support CCP recovery, and regular reviews of CCP rulebooks by resolution authorities with CCP primary regulators, and systemic risk regulators.

“Together, our recommendations will help ensure that CCPs are optimally structured to make sure the market remains resilient in the unlikely event of a meaningful disruption,” Eileen Kiely, Deputy head of counterparty and concentration risk at BlackRock, commented.

Similarly, Vanguard’s global head of capital markets legal and regulatory at Vanguard, William Thum, added that although many risks related to central clearing have been mitigated, additional protections are needed to strengthen margin calculations and default fund components, while preserving assets of non-defaulting participants.

“Together, these recommendations form a path forward to aligning incentives and enhancing financial stability through even stronger CCPs,” said Nicolas Friedman, global co-head of counterparty risk at Goldman Sachs.

The debate over CCP safety and soundness was given impetus last year after a high-profile default at the Nordic clearing house run by Nasdaq caused two-thirds of its mutual default fund, which its clearing members contribute to, was used to cover the loss.