Regulators are no closer to providing guidance over safeguarding the risks posed by clearing houses and limiting losses to clients, according to panellists at London’s FIA IDX conference.
Marnie Rosenberg, global head of clearinghouse risk at JP Morgan, told delegates that central counterparties (CCPs) face the same risks as any other investment firm, including litigation risks, cyber-attacks, and investment losses, and regulators need to identify this.
“What is surprising is that they [CCP] are treated differently to basic financial structures. Regulators need to do a lot more work over the next two years to think about what is the most appropriate amount of capital they should hold to cover potential losses,” said Rosenberg.
Rosenberg highlighted that JP Morgan’s largest exposures are with CCPs, and current capital levels held at CCPs are not enough to cover losses from defaulting members and other risks.
“These are critical infrastructures to us, and our trade exposures are driving it. We want to make sure there is sufficient resources put into this area,” she added.
JP Morgan has been a long-time critic of current CCP procedures, arguing that a potential conflict of interest exists between subsidising listed companies and maximising shareholder profits. Rosenberg suggested that for the larger clearing houses, such as CME Clearing and LCH, they account for around 40% of the total risk in the market.
At the industry-wide level, there are still uncertainties over which types of losses should be covered by the CCP or by its clearing members.
Sunil Cutinho, president of CME Clearing, argued that clearing houses should not foot the bill for defaulting central securities depositories (CSDs), which handle the majority of collateral posted to clearing houses.
“What we take issue with is when non-default issues are discussed that a CCP has to cover the failure of a CSD. This can result in encumbering assets, and it will impact all the collateral posted by firms. There is an expectation CCPs should take this, but we don’t make custodial decisions, and this is where we take exception,” said Cutinho.