Comments from SIBOS: DTCC's Bodson says CCPs not necessarily safer for OTC clearing

This sounds to us like a “The Emperor is wearing no clothes” moment…..

Michael Bodson, chief operating officer of US post-trade utility Depository Trust and Clearing Corporation, insisted that central counterparties (CCPs) were not necessarily a more effective means of reduce counterparty risk in the OTC derivatives markets than existing arrangements.

“CCPs did work very well during the crisis but by putting OTC derivatives on swap execution facilities and clearing them through CCPs you’re taking a futures model, which is a short-dated product, and putting into it a global market that is ten times the size, with longer dates, different underlying names and variable liquidity along the yield curve, which means you don’t have price transparency or the same sort of price formation. If I was running a credit default swap CCP, I would never sleep,” Bodson said. “Regulators are trying to do the right thing in terms increasing safety and soundness, but in some ways they’re trying to force something into a structure which may not be appropriate. The bilateral model may not be a bad thing if it’s well regulated and well risk managed.”

The Group of 20 political leaders has demanded that the vast majority of OTC derivatives are standardised for trading on exchange-like platforms and clearing via central counterparties to reduce counterparty risk.

Also speaking at Sibos, Werner Steinmueller, head of global transaction banking and member of the group executive committee at Deutsche Bank, said that the bank had set aside a “triple-digit-million EUR number” to handle the changes in the OTC derivatives market in the US alone, adding that increased collateral requirements and margin calls would create ongoing operational costs. But he also called for more clarity on safeguards and liabilities in the event of a CCP failure.

“Exposures for CCP members are unlimited but as a bank I am not normally allowed to take unlimited risks. If we are taking on a new systematic risk then we have to tackle it,” he said. Noting the failure of Hong Kong’s clearing house in 1987, he asserted: “There is no risk free system. CCP participants should be aware of their risks. The risk for the tier one participants should be very high but limited, so who carries the rest of the risk?” Using CLS Bank, the FX settlement facility, as an example of good practice, Steinmueller said liquidation and unwinding procedures for CCPs had to be clarified ahead of the G-20 deadline of end-2012 for migration of OTC derivatives to exchanges.

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