In a speech before the FIA Asia Derivative Conference, CFTC Commissioner Mark Wetjen called attention to the concentration of risk in central counterparty clearing houses (“CCPs”) resulting from the increase in clearing volumes, and suggested ways to address related areas of risk-management.<\/p>\n
Commissioner Wetjen began his remarks by discussing progress made to implement the G20 goal of clearing standardized swaps on CCPs. He commended the successful market and regulatory efforts to increase centralized clearing for OTC swaps, noting that central clearing promotes financial stability by (i) mitigating counterparty credit risk, (ii) enhancing transparency, and (iii) facilitating more efficient use of capital through clearing’s netting effects.<\/span><\/p>\n The Commissioner’s FIA remarks primarily focused on three risk-management areas that could benefit from regulatory and market scrutiny:<\/p>\n In regards to stress tests, Commissioner Wetjen suggested that more uniform, standardized stress tests would “enable greater coordination among global regulators in assessing the risk-management practices of CCPs.” This, he noted, would enhance transparency for clearing members who belong to multiple CCPs. Commissioner Wetjen urged the CFTC to begin a public dialogue to consider these issues through the release of a concept release or through one of its advisory committees.<\/span><\/p>\n On the topic of loss mutualization, Commissioner Wetjen urged the CFTC to consider a rule addressing appropriate CCP capital contributions to the default waterfall. Global harmonization, he suggested, may be appropriate on this point. He advised that this policy, too, should be pursued through a CFTC release seeking comment or one of its advisory committees.<\/p>\n Lastly, Commissioner Wetjen stated that \u2013 in an effort to minimize the “contagion risk” to the broader market \u2013 regulators should work closely with CCPs to help assess the effectiveness of clear and detailed recovery and wind-down plans. He noted that if a CCP operates in multiple jurisdictions, cross-border regulatory coordination and collaboration is crucial.<\/p>\n Commissioner Wetjen concluded by stating that he intends to call a meeting of the CFTC’s Global Markets Advisory Committee this winter where market participants and regulators can further examine and discuss these important CCP risk-management issues and produce a recommendation.<\/p>\n Lofchie Comment:<\/span> Regulators and market participants (led by the JP Morgan study)<\/a> are facing the harsh reality that central clearing corporations centralize risk to a degree far beyond what previously existed in the market. While there may be some benefits to greater standardization of CCPs, as Commissioner Wetjen suggests, this also exacerbates the problem of centralization of risk, since it forces all market participants to adopt the same standards of risk measurement. Now that the regulatory optimism over the risk-mitigation benefits of central clearing has crested, it seems like an appropriate time to consider holding off on further requirements to force central clearing on huge segments of the financial markets.<\/span><\/p>\n<\/blockquote>\n See:<\/span> Text of Commissioner Wetjen’s Speech<\/a>. <\/p>\n","protected":false},"excerpt":{"rendered":" In a speech before the FIA Asia Derivative Conference, CFTC Commissioner Mark Wetjen called attention to the concentration of risk in central counterparty clearing houses (“CCPs”) resulting from the increase in clearing volumes, and suggested ways to address related areas … Continue reading \n
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See also:<\/span> JP Morgan Issues Paper on Resolution Plan for Central Clearing Parties<\/a> (October 6, 2014).
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