The World Federation of Exchanges (WFE) has published a set of guidelines aimed at improving processes for central clearing counterparties (CCPs) handling potential non-default losses (NDL).
In a statement, the global industry association for exchanges and clearing houses said the new procedures will allow a more transparent and predictable process in how NDLs are allocated and handled in central clearing.
“Non-default losses may not be the main risk faced by CCPs, but it is still important to have a structured approach to dealing with them,” said Nandini Sukumar, CEO of WFE. “That way, CCPs can devote more time to their day job, ensuring that uncertainty over counterparty credit exposures does not threaten the integrity of the financial system.”
While exact policies for NDLs differ according to each CCP, WFE highlighted that CCPs should focus on avoiding and mitigating the risks and potential losses due to NDLs. Where they cannot be avoided, WFE laid out guidance on how CCPs should manage NDLs.
CCPs usually absorb certain NDLs from their own capital, although market participants are required to back the risks they take by posting margin and other resources. WFE added that clearing houses have continued to support markets throughout the COVID-19 pandemic, allowing participants to trade, position and hedge portfolios despite the volatility.
The guidelines follow news at the end of March that Dutch bank ABN Amro would incur a $200 million loss after a single client failed to meet margin calls to keep trading. The bank said that its clearing arm, ABN Amro Clearing, was forced to close-out the client’s position to prevent further losses.
“While the impact of NDLs on a CCP’s operations and the allocation of such losses are clearly legitimate policy considerations, the focus should continue to be on the avoidance and mitigation of risks resulting in NDLs in the first place,” the report from WFE concluded.