U.S. Banks Demand Stricter Measures On CCP Collateral Use

An association of U.S. Banks has urged Jacob Lew, chairman of the Financial Stability Oversight Council (FSOC), for stricter measures on how collateral is accepted by clearing houses, amid growing fears of systemic risk.

The Clearing House (TCH), a U.S. trade group, argued regulators should put in place requirements on how collateral is used by clearing houses, also known as central counterparties (CCPs), so as to avoid putting other banks at risk.

Paul Saltzman, president of TCH, said in a letter to Lew: “Current CCP practices with respect to participant collateral (including commingling, rehypothecation or title transfer arrangements) expose clearing members to heightened custody and investment risks.

“To address these issues, regulators should provide detailed guidance regarding the specific protections a CCP must employ to safeguard participant collateral, including a requirement that a CCP invest participant collateral only in assets with minimal credit, market and liquidity risks.”

Clearing houses have been at the forefront of post-crisis reforms; however there is now the concern among the industry that systemic risk has simply transferred from the big banks to the CCPs.

This has led to intense scrutiny in how clearing houses use and manage collateral posted to secure trades between counterparties.

In the letter, Saltzman also argues regulators should specify the types of investments CCPs can use collateral for, and they “should be required to obtain liquidity from diverse sources… rather than depend on clearing members to provide liquidity through rule-based mechanisms.”

The trade group also states that clearing houses should increase transparency, carry out stress tests, and inject more of their own capital to their default fund. These arguments are similar to those of J.P Morgan and the International Swaps and Derivatives Association.