A clear danger ahead
As the
regulators push us towards centralised clearing for OTC derivatives they may
actually be making the world distinctly less safe.
At face value
it makes obvious sense; if one party defaults the CCP steps in. As always,
though, the problem lies in the detail but this time not too far below the
surface.
The first problem
concerns the efficient use of margin. As CCPs start to uncouple from their
parent exchanges and compete more directly with each other it’s only natural
for them to start trying to differentiate more.
An obvious
step is to offset margin requirements from equivalent (but not fungible)
products, especially given the opportunity cost of capital these days.
This could now
include OTC products and exchange-traded ones, say a Euro-Swap and a Bund. This
is ok in principle, but ‘equivalent’ is very different from ’same’ and a race
to the bottom in this type of competitive activity will increase systemic risk
rather than reduce it.
The second
problem lies in post-trade and allocations. In derivatives this is complicated
enough, especially when the executing broker is different from the clearing
broker (or brokers) for the actual fund sub-accounts.
Now multiply
this complexity by the number of Sefs (or OTFs) that emerge, then multiply it
again by every clearing house and, finally, throw in the fact that there is no
agreed sequence for the messages and you start to get a distinctly queasy
feeling.
I think I’ll keep
my hard-earned cash under my mattress
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