Some of the world’s largest asset managers, including BlackRock, Fidelity and Schroders, have voiced their concern to the European Commission on how clearing houses treat investors funds in times of a member default.
In a joint letter to European Commissioner Jonathan Hill, following the review of EMIR and the EC's proposal covering CCP recovery and resolution, these asset managers argue that clearing houses, or central counterparties (CCPs), applying haircuts to collateral pledged by investors will “undermine financial stability”.
“End-investors do not own that infrastructure and have deposited money in good faith – undermining that good faith by hair cutting initial margin (IM) and/or variation margin (VM) will lead to perverse systemic consequences,” the letter said.
“We recommend IM haircutting is taken off the table altogether and VM considered only as a recovery tool of the last resort.”
Furthermore it also criticises CCPs retaining a portion of a non-defaulting participant’s initial margin, as it would “fundamentally alter the market’s view of cleared products.”
The letter is signed by the European heads and heads of investment of BlackRock, Allianz Global Investors Europe, Schroder Investment Management, PGGM, UBS Global Asset Management, and Fidelity Worldwide Investment, among others.
Since the onset of post-crisis rules, more financial trading products are being forced through central clearing in order to mitigate risk and safeguard against counterparty defaults.
However this has raised new concerns that new rules are concentrating risks in just a handful of clearing houses, and that in the event of a member default or CCP default, it could affect the entire financial system.
The letter also proposes the European Commission should enforce mandatory stress tests for CCPs, increased funds from the CCPs themselves (skin-in-the-game) during a member default, and in the case of the CCP defaulting, ensure that at least two other CCPs can offer clearing for any mandated product.