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CCP pig lipstick

ISDA has joined the swelling chorus of the concerned about CCPs, issuing “Principles for CCP Recovery”, a short document outlining five recovery and resolution issues. Its first page introduces a new financial acronym- PONV- “point of non-viability”[1], essentially the trigger point for resolution. ISDA’s chief executive Scott O’Malia said, “This is a debate about what happens when a clearinghouse begins to wobble, and there’s concern about financial stability. We have established the principles to intellectually attack this problem.” Brief highlights follow:

  • Transparent risk management standards, practices and methodologies. The calculation methods for loss-absorbency resources and “skin in the game” must be transparent to enable market participants to assess a CCP’s potential resilience
  • Mandatory, standardized and transparent stress testing. Risk management methodologies to be regularly tested using standardised and transparent criteria
  • Significant CCP SITG. A CCP’s “skin in the game” (own contribution to loss-absorbing resources) should be fully funded, material and substantial.
  • Clearly defined CCP recovery plans. Recovery mechanisms should be clearly defined and transparent. Rules for cash calls on members should be limited, capped and transparent. Loss-allocation should be on the basis of pre-agreed rules and economic viability for all categories of clearing participant
  • Clearing service termination or resolution. Recovery should only proceed while the debt management process is effective and clearing remains viable. If recovery efforts are ineffective, unfeasible or create systemic instability, the resolution authorities will decide on the closure of the clearing service

The above principles are both obvious and tautologous; perhaps sometimes the obvious needs to be shouted out. With a few notable exceptions, support for the CCP model has been effectively unanimous until recently. ISDA joins JP Morgan and BlackRock among others in questioning the depth of CCPs’ financial commitment. It remains to be seen whether the criticisms will be extended to questioning whether the concept itself is fit for purpose and what that purpose may be. Conceived as an answer to arguably the wrong question, credit crunch instead of liquidity loss, further buttressing of the CCP credit fortress model may be the proverbial application of porcine cosmetics.


[1] Interestingly, PONV is more widely known as denoting Postoperative nausea and vomiting

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