Keynote Remarks of CFTC Commissioner Rostin Behnam at the Federal Reserve Bank of Chicago’s Fifth Annual Conference on CCP Risk Management, Chicago, Illinois
CCP Governance and Risk Management
CCP governance is a topic of increasing emphasis among domestic and international regulators, particularly the potential conflict of interest between shareholders and clearing members arising from the CCP’s mutualization of risk. Conflicts between CCPs and clearing members have focused on risk management or risk-related issues generally. Many clearing members have expressed concerns that their interests may not be adequately represented in governance structures that focus on shareholders, considering the clearing members, through mutualized default funds, are the bearers of a vast majority of the CCP’s tail risk. As you know, there is an ongoing debate about the appropriate amount of CCP capital in the default waterfall.
Separately, there is a discussion percolating about the interests being served by the “hat” worn by clearing member employees who sit on the risk management committee. Specifically, how do clearing member employees manage conflicts between their incentives and duties regarding prioritizing the safety and soundness of the clearinghouse, any duty owed to the shareholders of the clearinghouse, and advancing the interests of their firm? There is considerable potential for value from including clearing member employees as expert members of risk management committees. However, in order for this value to be realized, any conflict or tension must be addressed and resolved.
Mostly through my sponsorship of the MRAC, I have heard that further review and discussion of CCP governance structures, particularly with respect to the risk committee, is necessary. Therefore, I will be convening the MRAC for a meeting on December 4th to discuss these issues. I believe the recent clearing default at NASDAQ is further evidence that governance and risk management issues must be continually discussed, debated, and refined as necessary. There is no shortage of hypotheticals. There is no shortage of unique market factors. There is no shortage of unexpected events that will drive markets into scenarios not foreseen and potentially plausible. We all must remain diligent, patient, and open to continuous discussions to prevent defaults and market crises in the future. Clearing will not eliminate losses. But, the collective regulatory and market participant community must do everything to reduce them.