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“Open kimono” approach to default of a CCP’s clearing member

On 2 November 2015, the CFTC’s Market Risk Advisory Committee gathered to discuss the recommendations of its CCP Risk Management Subcommittee, which is dedicated to CCPs’ preparations for the default of a significant clearing member.

The Committee conducts public meetings, submit reports and presents recommendations to the CFTC on matters relating to evolving market structures and movement of risk across clearinghouses, exchanges, intermediaries, market makers and end-users. The inaugural meeting was held on 2 April 2015, where a discussion was opened on default management at CCPs.

The CCP Risk Management Subcommittee was subsequently established to focus on two major questions:

  1. Are there ways in which the CCPs’ efforts could be more reflective of actual market conditions in the case of the default of a significant clearing member?
  2. Are there ways in which CCPs can coordinate further in their efforts to prepare for the default of a significant clearing member?

Both the Committee and its Subcommittee brought around the same table big names amongst the most important CCPs, clearing members, buy-side, end-users and academics. Notwithstanding a relatively short track record, the authorities were swiftly positioned to tackle CCP issues of systemic importance.

The Subcommittee presented a set of detailed recommendations  addressing the first question. Issues were flagged in connection with:

  • Interdependencies Among CCPs and Key Intermediaries / Markets
  • Portability and Clearing Member Resource Availability (Financial and Operational)
  • Auction Process Consistency & Transparency
  • Auction Participation by Customers (i.e. by Non-Direct Clearing Participants)
  • Default Management Committee Participation

The initiative should be welcomed as it is more likely to ensure that regulators and market participants are on the same page when the time comes to reinforce the default management process of CCPs. Rules should be based on solid evidence and genuine analysis, rather than pre-emptive shots in the dark.

Most significantly, the greater transparency that comes with the public nature of the deliberations should be well received not only by market participants, but also by other regulators which could see the positive value of such a lucid process on the level of confidence of all stakeholders.

The full archived webcast is available here.

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