CFTC Chair Timothy Massad announced in a recent interview that the CFTC is planning to bolster its examinations of clearinghouses (“CCPs”) to ensure their health. He noted that the CFTC will work with the Board of Governors of the Federal Reserve System on the effort.
Chair Massad cited new rules, which require banks and other firms to use CCPs owned by LCH.Clearnet Group Ltd, CME Group and ICE, as examples of how intensifying the oversight of CCPs can help “monitor and mitigate risks” without eliminating them.
Separately, in an online commentary, University of Houston Finance Professor Craig Pirrong discussed Chair Massad’s statement, explaining that “making CCPs less likely to default does not necessarily increase the safety of the financial system.” While former CFTC Chair Gary Gensler repeatedly discussed reducing the interconnectedness of the financial system through the clearing mandate, Mr. Pirrong stated that the mandate “just reconfigures interconnections” and redirects stresses to other vulnerable parts of the financial system.
Lofchie Comment: After years of assurances that clearinghouses never fail, it is a breath of fresh air to have the new Chair admit openly the risks created by clearinghouses and acknowledge the need to be mindful of these risks. This welcome openness should make it possible for regulators, academics and market participants to engage in realistic discussion of both the benefits and the risks provided by clearinghouses. As the blog post by Professor Pirrong points out, making clearinghouses safer does not necessarily do the same for the financial system. In fact, it could make the system more vulnerable. The fact that clearinghouses have the unlimited power to demand cash collateral from clearing members makes the clearinghouses safer at the expense of their clearing firms, which is arguably a net loss to the safety of the financial system as a whole.
See: Bloomberg News Article Quoting Chair Massad.
See also: “Cleaning up after the Dodd, Frank & Gensler Circus,” by Craig Pirrong, Streetwise Professor.