CFTC Commissioner Bowen Highlights Importance of Robust CCP Risk Management

In her opening statement before the Market Risk Advisory Committee (“MRAC”), CFTC Commissioner Sharon Y. Bowen stressed that (“the importance of effective, robust risk management of Central Counterparties (“CCP”), which she said “cannot be understated.” She also outlined the agenda for the meeting.

Commissioner Bowen began by announcing that the CCP Risk Management Subcommittee would present its recommendations to CCPs on how to make the efforts outlined in their presentations more reflective of actual market conditions in the case of the default of a significant clearing member. Commissioner Bowen also announced that CCP Risk Management Subcommittee members planned to recommend ways in which CCPs could further coordinate their efforts to prepare for the default of a significant clearing member “early next year.”

Lofchie Comment: Strong risk management at a clearinghouse connot eliminate the risks created by mandatory clearing. In fact, it may exacerbate systemic issues, since the ability of the CCP to demand more collateral, or to require the closeout of positions, may benefit the position of the CCP at the cost of both (i) causing a sell-off in the financial markets and (ii) withdrawing liquidity from the markets at a time when all participants are rushing toward the safety of cash and the U.S. government. See, e.g., Streetwise Professor Discusses Limitations of Dodd-Frank (July 22, 2015). To the extent to which the larger is not risk that a clearinghouse will fail, but rather that it will scramble to survive and damage the broader economy, a question arises: should the CFTC be the only regulator dealing with an issue that involves a broad systemic risk?