New York, January 07, 2016 — Today, Moody’s Investors Service published its new methodology for rating central counterparty clearing houses globally. The publication comes following the Request for Comment period that began on 22 June 2015 and closed on 17 September 2015.
As part of the methodology, Moody’s established a new type of rating, a Clearing Counterparty Rating (CCR), which reflects Moody’s opinion of a clearing house’s ability to meet the timely clearing and settlement of clearing obligations by the clearing house as well as the expected financial loss in the event the obligation is not fulfilled. The CCR is therefore Moody’s opinion of the creditworthiness of the clearing house in a counterparty risk context.
The methodology considers a clearing house’s member-default management capabilities and related structural protections, as well as its business and financial fundamentals and operating environment, while also laying out the key quantitative metrics and qualitative factors Moody’s incorporates into its analysis.
As today’s clearing houses can be comprised of multiple, distinct ‘ring-fenced’ clearing services, the credit quality of the individual services often is driven by different elements of risk. As such, under this methodology, Moody’s will assign ratings at the clearing service level within the clearing house in order to capture the different risks that each faces resulting from each clearing services’ membership and products cleared.
Moody’s notes that clearing houses play a central role in the risk management within financial markets, with the industry showing a strong history of default avoidance. Over the last two decades, however, the industry’s landscape has undergone dramatic changes, with clearing volumes undergoing a ten-fold increase and the products that the clearing houses manage becoming increasingly complex.
Since 2008, global regulators and standard setters have been moving toward mandatory central clearing of over-the-counter (OTC) derivatives as a means of reducing counterparty risk and interconnectedness among financial institutions as well as mitigating the systemic risks related to uncertainty over the size and nature of firms’ exposures to derivatives. This increased channeling of financial market activity to clearing houses has made their role critical to the health of the financial system. Moody’s global rating methodology will provide investors with insight into the factors that determine central counterparty clearing houses’ credit strength.
The finalized central counterparty clearing house methodology builds on Moody’s existing methodologies and leverages the rating agency’s long-standing experience in analyzing the credit profiles of both the clearing houses and their members.
As part of this methodology implementation Moody’s will be assigning CCRs to currently rated clearing houses and/or clearing services and withdrawing their long-term issuer ratings. Separate announcements will detail the specific rating changes.
Moody’s “Clearing Houses Rating Methodology” is available at:
http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_185314
