Institutional Investors are increasingly warming towards central clearing as a means to reduce system risk, a survey from research group Greenwich Associates found.
According to the results, 80% of investors believe central clearing of derivatives mitigates risk in global financial markets. In addition, almost 70% of respondents believe clearing houses have adequate financial resources to handle a major multiple bank default, providing a strong vote of confidence in both the risk frameworks and the clearing firms operating them.
“Investors recognise the many benefits of central clearing, including counterparty risk reduction, improved transparency, better mark-to-market pricing, and a more efficient OTC derivatives market,” says Kevin McPartland, head of Market Structure and Technology Research, Greenwich Associates.
However, the survey also found a clear misunderstanding in the default management waterfalls at the clearing houses.
When asked about additional steps for clearing houses, the two most frequent suggestions from investors included providing CCPs access to central bank liquidity and requiring them to have more of their own money contributed to the default fund.
“Ensuring clearinghouses’ incentives are properly aligned with robust risk management practices is critical, but limited knowledge of individual default waterfalls could result in a push for market structure change that, over the long term, could prove detrimental to the derivatives market as a whole,” adds McPartland.