New York, NY – January 12, 2015 – Today, The Clearing House Association (TCH) submitted a letter to the Financial Stability Oversight Council (FSOC) urging it to lead a coordinated effort of its member regulatory agencies to address and mitigate systemic risk arising from increasing market reliance on central counterparties (CCPs). In the letter, TCH details a set of concrete recommendations that would subject CCPs to more stringent standards and help ensure that their risks are more carefully managed and mitigated.
“It is crucial that U.S. regulators do more to address and mitigate the systemic risk posed by CCPs. There has been only minimal progress made to date, and unfortunately the measures adopted thus far are insufficient to address the threats that CCPs can pose to financial stability,” said Paul Saltzman, President of The Clearing House Association. “This is a prime example of the kind of issue that the FSOC was meant to take on when it was created. The FSOC has the expertise, shared responsibility, and authority to deal with the systemic risk posed by CCPs, so it makes sense for FSOC to assume a leadership role in coordinating the development of a robust, uniform regulatory approach for addressing CCP systemic risk.”
The Dodd-Frank Act mandates clearing of standardized over-the-counter derivatives through CCPs, which TCH supports as a sensible reform. However, the movement of these transactions to central clearing can itself concentrate risk in the CCPs. This risk must be appropriately managed so that CCPs do not become a source of contagion to their clearing members, customers, or the financial system more broadly during periods of market stress.
In the letter, TCH recommends FSOC take 5 concrete steps:
Limited Mutualized Liability for Clearing Members: Regulators should ensure that the potential liability of non-defaulting members of a CCP in the event of a default by one or more other members is predictable, transparent, reasonable, and limited.
Skin-in the-Game for CCPs: Regulators should insist that all CCPs have sufficient incentives to manage the risks arising from their operations (that is, have “skin-in-the-game”).
Transparency, Stress Testing, and CCP Disclosure: Regulators should require greater transparency in CCP risk management practices, including methodologies for margin calculations, guaranty fund contributions, and the framework for stress testing and stress testing results.
Safeguarding Collateral and Liquidity: Regulators should establish stronger safeguards for collateral posted by clearing members to the CCP, including standards for eligible collateral and consequent liquidity requirements.
CCP Recovery and Resolution Planning: Regulators should develop effective standards and planning for the recovery and resolution of CCPs to ensure operational continuity.
TCH has long supported the establishment of enhanced regulatory standards for CCPs. In December 2012, TCH released a white paper titled Central Counterparties: Recommendations to Promote Financial Stability and Resilience, which identified the unique roles that CCPs can play in the derivatives market and in the promotion of financial stability. The white paper also noted that if risks arising from CCPs’ structure and operations are not adequately addressed, these institutions could threaten the stability of the financial system during periods of market stress by imposing severe capital and liquidity strains on the market generally and specifically on their clearing members. The paper made many of the same recommendations included in today’s letter to the FSOC. However, two years later, many of the risks highlighted in the paper remain unaddressed by regulators.
Following the release of the white paper, TCH has continued to voice its strong support of regulatory efforts to develop heightened regulatory standards for CCPs through numerous comment letters to U.S. and international policymakers calling for greater and more effective management of the systemic risks that CCPs may pose. Today’s letter reflects TCH’s continued support of heightened regulatory standards for CCPs.
About The Clearing House Established in 1853, The Clearing House is the oldest banking association and payments company in the United States. It is owned by the world’s largest commercial banks, which collectively hold more than half of all U.S. deposits and which employ over one million people in the United States, and more than two million people worldwide. The Clearing House Association L.L.C. is a nonpartisan advocacy organization that represents the interests of its owner banks by promoting and developing policies to support a safe, sound and competitive banking system that serves customers and communities. Its affiliate, The Clearing House Payments Company L.L.C., which is regulated as a systemically important financial market utility, owns and operates payments technology infrastructure that provides safe and efficient payment, clearing and settlement services to financial institutions, and leads innovation and thought leadership activities for the next generation of payments. It clears almost $2 trillion each day, representing nearly half of all automated clearing-house, funds transfer and check-image payments made in the United States. See The Clearing House’s web page at www.theclearinghouse.org.