In a new report on interconnectedness and systemic risk, IOSCO, the Financial Stability Board, the Committee on Payments and Market Infrastructures and the Basel Committee on Banking Supervision (collectively, “international standard-setting bodies”) mapped the network of relationships between central counterparties and their clearing members. This report is the second issued by the international standard-setting bodies on central clearing interdependencies. (The first is available here.)
The regulators found, among other things:
- “prefunded financial resources are concentrated at a small number of CCPs” (e.g., the two largest cross-border central counterparties (“CCPs”) account for roughly 40% of total prefunded financial resources);
- CCP exposure is concentrated, with the 11 largest clearing members connected to 16-25 CCPs;
- the network of relationships between CCPs and other financial institutions is characterized “by a core of highly connected CCPs and entities and a periphery of less highly connected CCPs and entities”;
- only a small number of entities control the provision of each of the critical services required by CCPs; and
- clearing members and their affiliates are also providers of critical services required by CCPs, such as being custodians or liquidity providers, so that if a significant clearing member were to default, it is very possible that the same entity could also be a vital service provider to the CCP.
The regulators cautioned that they did not assess potential “feedback mechanisms” that could amplify any initial stress. Further, they noted, the study was not intended to address the risk of central clearing, but rather to evaluate levels of interconnectedness. The regulators noted that central clearing is “intended to reduce the risk of contagion in financial markets, but it does not eliminate it”.
Lofchie Comment: Has mandated central clearing exacerbated interconnected risk and too big to fail? If so, would further mandates make it worse? Are the results of mandated central clearing playing out the way in which the regulators expected, particularly in terms of the very great concentration of risk in a very small number of firms and the very small number of firms able to provide broad access to CCPs?