Central counterparty (CCP) complaints over the International Organization of Securities Commission’s (IOSCO) push for transparency may have an ulterior motive: competition, according PJ Di Giammarino, CEO of regulatory think tank JWG.
IOSCO, alongside the Committee on Payments and Settlement Systems (CPSS), last October released a consultative document on quantitative data that CCPs should publicly release.
Submissions to the consultation have since been released, with CCPs criticising the proposal to release details about positions, collateral held and stress tests, saying it could be misinterpreted and damage market confidence.
Di Giammarino said although CCPs had reason to be cautious, there was also a competitive aspect to their criticisms.
“If you have [rival clearers] CME Group and LCH.Clearnet looking at each other’s methodology, for example, they can figure out how to be more competitive,” he said.
“That’s not something regulators are particularly bothered by. They would like the markets to be more competitive and costs to go down.”
But Di Giammarino said there was “legitimate concerns” that the market could be spooked if CCPs risk management policies were disclosed inappropriately.
“The fact is that globally regulators aren’t particularly good at specifying standards for this information. We do not have a lot of the common identifiers required for accurate comparison.”
Transparency quest
CCPs’ role in the financial system has changed since the financial crisis. As a result of G-20 reforms – specifically the US Dodd-Frank Act and the European market infrastructure regulation (EMIR) – mandating market participants to centrally clear OTC derivatives trades, the risk that once sat with banks has been transferred to CCPs.
The challenge for regulators now is making sure CCPs can handle any future stress. The objective of CPSS-IOSCO, according to the Commission’s consultative document, is to compare CCP risk controls, including financial condition and financial resources to withstand potential losses; have a clear, accurate and full understanding of the risks associated with CCP; and understand and assess the risks of participating in CCPs.
However, the Global Association of Central Counterparties (CCP12), in its submission, said quantitative disclosure requirements should not include any information that could result in the disclosure of confidential and proprietary information of the CCP, its clearing members and clients.
“CPSS-IOSCO should be cognizant of the ability of sophisticated parties to potentially reverse engineer confidential and sensitive information,” it said.
Eurex Clearing echoed CCP12’s calls, saying that comparing CCPs on a singular piece of data without full knowledge of the inherent risk management methodology can be very misleading.
“Since the risk methodologies of CCPs are unique and differ, the resilience of a CCP to absorb defaults and external shocks should be judged by the respective regulators and rather should not be subject to public discussion,” it said.
The European Association of CCP Clearing Houses said the level of detail to be published goes “far beyond” the EMIR and Dodd-Frank Act requirements on disclosure by CCPs and the earlier CPSS-IOSCO disclosure framework.
Members were concerned the consultation places a high burden of reporting onto CPPs, without acknowledging a lead-time for implementation efforts, it said.
IOSCO are to review the comments and publish a report later this year.